HCL Technologies Limited (HCLTECH.NS) Q3 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to HCLTech's Q3 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Mohta, Head Investor Relations. Thank you, and over to you, sir.

Thank you, Devin. Good morning, and good evening, everyone. A very warm welcome to HCL Tech's Quarter 3 FY '26 Earnings Call. We have with us Mr. C. Vijay Kumar, CEO and Managing Director at HCLTech; Mr. Shiv Walia, Chief Financial Officer; along with the broader leadership team to discuss the performance of the company during the quarter, followed by a Q&A. In the course of this call, certain statements that will be made are forward looking which involve a number of risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those in such forward-looking statements. All forward-looking statements made herein are based upon information presently available to the management, and the company does not undertake to update any forward-looking statements that may be made in the course of this call. In this regard, please do review the safe harbor statements in the formal investor release document and all the factors that can cause the difference. Over to you, CVK.

Thank you, Nitin. Good day, everyone. Thank you all for joining HCLTech's FY '26 Q3 earnings call, wishing all of you a very happy new year. I'm very pleased to report HCLTech has delivered another standout quarter on all fronts, revenue growth, bookings and margin improvement. This performance is underpinned by our AI vision and offerings, our deep engineering heritage and unwavering commitment to client value creation. We delivered excellent top line growth this quarter demonstrating our ability to capture market opportunities even in what is seen by many as a constrained environment. Reflecting on the quarter, we see continued momentum in AI-powered solutions like physical AI, AI factory, custom silicon engineering as well as large-scale transformation programs and application development and modernization offerings. Our revenue for Q3 came in at $3.7 billion, a growth of 4.8% year-over-year and 4.2% on a quarter-on-quarter in constant currency terms. This quarter, we also crossed $15 billion of annualized revenue. This milestone reflects the scale of our platform and the durability of our growth model. Our services business grew 5% year-over-year and grew 1.8% sequentially. Our IT and Business Services grew 3.8% year-on-year and grew 1.5% sequentially. Engineering and R&D Services grew 10.8% year-on-year and grew 3.1% sequentially and all growth rates referred here are in constant currency. HCLSoftware delivered very good performance. Business grew 3.1% year-on-year and a 28.1% sequentially in constant currency, a seasonal uptick that was also a healthy year-on-year growth. Annual recurring revenue stood at $1.07 billion, 0.6% increase Y-o-Y in constant currency. In addition to the seasonality, this growth is fueled by strong traction in our data intelligence business. Our operating margin, including restructuring costs, but excluding the onetime impact of new labor code came at 18.6%, 111 basis points Q-o-Q and a decrease of 94 basis points year-over-year. When we exclude restructuring costs, our operating margin in Q3 is down marginally 13 basis points year-over-year, and we are confident of recovering that as well in the future. We are executing well on our improvement plan, and this disciplined approach has placed us firmly in the right trajectory for the medium term. Shiv would provide further details on the adjustments both for restructuring costs and the onetime labor code impact. Our net new bookings were strong at $3 billion, which is a 17% quarter-on-quarter and 43% year-over-year growth. Booking momentum this quarter was driven by strong traction in our applications and engineering and R&D services, which together accounted for 62%. I will talk about this and the mega deal later. We also delivered strong ACV booking, which is the highest in the last 4 years. Coming to people metrics. Our headcount at the end of December stood at 2,26,379, a slight decline of 0.1% compared to the previous quarter. Our attrition stands at 12.4% on an LTM basis, lower compared to the previous quarter. I'm happy to share we have been included in Forbes list of world's best employers for the sixth year in a row. Coming to AI updates. Our AI propositions continue to drive our overall business reflected as a robust growth, highlighting the strength of our value propositions, our comprehensive ecosystem and the confidence our clients have in us as an AI partner in their transformation. AI is now embedded across every major engagement, whether service transformation, advanced AI or classical AI. Our strategic focus and early bids are positioning us as a clear leader in an AI accelerated world. In advanced AI, we have grown 19.9%, led by a strong uptick in Agentic physical AI and AI factory programs. We are now sharing the actual revenue for your reference in the investor release. Let me update you on the progress along the 4 pillars of our AI growth strategy. First, on our proactive transformation of our services. AI force our flagship platform remains a major market differentiator in this space. Specific SKUs of AI Force are now deployed across 60 of our priority accounts. We are seeing large AI-led service transformation, net new deals happening and service transformation increasingly becoming core to decision-making in every pursuit. Certain use cases like AI-led legacy modernization are also creating niche interest amongst our clients. In addition, we also continue to implement Gen AI and AI capabilities across our lines of business, and scale adoption with customer-specific AI tooling. To enable all this, we are making strong progress on the talent scale up front. Within HCLTech 38,000 plus additional employees have been trained on Gen AI and 600-plus on responsible AI. Today, we have the highest number of OpenAI badged experts among all OpenAI partners. Our proprietary talent acquisition platform, Talent Navigator has now been deployed at scale across HCLTech. The second pillar of our strategy is building differentiated IP that accelerates AI adoption for our clients. Our vertical aligned industry AI solutions continue to gain strong market traction. Our Contact Center as a Service offering is experiencing a notable adoption curve, driven by a strong agentic solutions for real-time guidance, knowledge-based solutions and omnichannel support. We had launched a AI Force 2.0 beta in the previous quarter, which is an agentic platform delivering service transformation offerings. We are seeing excellent results, and we expect to launch GA soon. On the third element of our strategy in new AI-led services, -- in AI factory, we launched OEM aligned joint offerings with Dell, HPE, Cisco, NVIDIA, AWS, Azure and GCP. Our engagement with one of the top 10 global tech companies to implement global AI factories continues to scale. We won another similar engagement last quarter. We are ramping up to service this demand. This is a significant growth vector for our digital foundation business. In physical AI, our proactive investments in skills, ecosystem build-out and our proven engineering and infrastructure strengths have allowed us to secure a differentiated position in this rapidly evolving market. AI engineering services are also seeing great demand. Custom silicon development focused on edge inferencing and compute for training. Both physical AI and custom silicon work are significant growth vectors for our engineering services. There is substantial momentum in the adoption of agentic solutions within application engineering, integration and migration services across industries such as telecom, financial services, life sciences and technology. Value stream innovation is getting reflected as increased momentum across key value chains, particularly in supply chain management, customer billing, commerce and retail. In AI advisory, we signed several significant engagements this quarter and also joined the AI Verify Foundation, reinforcing our commitment to trustworthy AI. And on the fourth pillar, we continue to strengthen our partnership ecosystem. We announced 2 major partnership advancements this quarter, the launch of a physical AI lab with NVIDIA in Santa Clara and exploration of next-generation industrial AI use cases with SAP. We deepened existing collaborations with AWS on AI-powered innovation for financial services sector. We deepened collaboration with OpenAI, increasing adoption of OpenAI Codex, making us one of the first GSIs globally to earn this recognition with OpenAI. All this effort is helping us several recognitions and citations, including a very notable mention as a key physical AI and robotics partner during NVIDIA CEO's keynote at CES 2026, which was -- which happened last week. This reinforces the strategic depth of our collaboration in physical AI. Many other recognitions are in the investor release. If I look at the outcome of our work on the AI front, I'm pleased to say we won several large engagements this quarter in areas like physical AI, our offerings like AI factory and AI foundry, and you can find more details in our investor release. Coming to bookings. As I mentioned earlier, we did $3 billion bookings this quarter. In our services business, we are also experiencing rapid growth in our application business, fueled by strong deal momentum and execution. Clients count on us for value stream transformation, application modernization, data solutions and large-scale system integration. If I look at our services business with a wider lens, our AI propositions drive success in areas like engineering productivity, enhanced data management and new digital experiences powered by Agentic AI Force 2.0. With the investments in enterprise advisory, digital, modern apps and commercial apps, data and core AI and the partnerships with hyperscalers and product companies, we are accelerating our customers' business transformation in a unique way. Calling out a couple of big deals, starting with the mega deal with a global apparel retailer, we won a mega 5-year strategic engagement with a TCV of USD 473 million to serve as its long-term AI-led technology partner. Under the agreement, HCLTech will modernize the client's application and data landscape, leveraging our Agentic AI Force 2.0 platform. The agreement extends beyond IT services to include collaboration on improving brand experiences while supporting evolving business needs of the client. Additionally, HCLTech will facilitate the transformation of clients' current operating model, simplifying the technology organization and realigning teams around outcome-oriented functional domains. This engagement is designed to improve engineering productivity, modernize software engineering and data life cycle management through advanced AI capabilities and deliver enhanced digital platforms and product experiences. A leading U.S.-based insurance company has chosen HCLTech as its strategic technology partner, consolidating services previously delivered across multiple providers. Powered by HCLTech's GenAI-led service transformation platform, AI Force, this partnership will help transform IT service delivery, enhancing engineering outcomes, accelerating time to market and driving operational efficiency through automation across application development, support, testing and infrastructure. A Europe-based global food major selected HCLTech to design and implement a greenfield IT setup and build an AI-powered digital foundation. HCLTech solution will include digital workplace, network, hybrid cloud, network security, service management, CM and automation. The new IT setup will integrate next-gen capabilities covering the AI life cycle and reimagining the business value chain. While we continue to win many such large deals, we remain disciplined to walk away from those that do not align with our financial and strategic objectives. We continue to guide our sales organization to remain focused on opportunities that make long-term economic sense. I also wanted to share some insights about our recent acquisition in the telecom engineering space. We've been seeing good traction in this space and to further reinforce our leadership in the telecom service provider industry. This quarter, we acquired Telco Solutions business from Hewlett Packard Enterprise. This strategic move builds on the momentum from our successful integration of HPE's Communications Technology Group acquired in 2024, which is now growing nicely. We are doubling down on telco solutions to gain more industry-leading intellectual property aligned with our nonlinear growth aspirations and enhance product engineering and R&D capabilities and deepen existing client relationship as well as gain new relationships with top global communication service providers across geographies. With this deal, we are now well positioned as an SI with comprehensive telecom IP portfolio, unlocking access to significant telecom engineering spend. It is now starting to reflect as a good telecom engineering pipeline. Now I want to provide some comments and update on our software business. This quarter, we've had multiple wins, including large ones. New clients were added across verticals and geographies. We achieved major competitive wins in HCL Workload Automation and UnO, which is an agentic AI orchestration product. We won competitive wins across regions where our products and offerings successfully displaced long-standing incumbents. Let me call out a couple of wins. A Europe-based technology service provider selected HCLSoftware's workload automation platform to offer secure, scalable, efficient digital banking services to its customers. The platform will be paired with HCL UnO to support the company's mainframe environment. A U.S.-based global food and beverage major selected the HCL Workload Automation platform to consolidate multiple environments, streamline operations and drive measurable cost efficiencies. A couple of these large opportunities were also synergy coming from our HCLTech services clients. On the partnership front, HCLSoftware and Microsoft have partnered globally to deliver HCLSoftware's unified XDO blueprint, which is experience data and operations to the joint customers using Microsoft's Azure and AI capabilities. HCLTech's Data and AI division, which is Actian is seeing increased demand for its management solutions. During the quarter, we announced the acquisition of Jaspersoft and Wobby, which will strengthen this division's offerings. By combining Actian's enterprise data management capabilities with Jaspersoft's advanced analytics, we will offer a unified end-to-end data and analytics platform that addresses rising demand for metadata management, data catalog and data governance. Integrating Wobby's proprietary semantic layer and agent architecture will help AI-powered natural language analytics on a unified governed platform, enabling clients to query complex data sets and receive actionable insights instantly. With the integration of Xenia, Wobby and Jaspersoft, HCLSoftware's data offerings is evolving into a holistic AI-powered end-to-end data intelligence platform with an integrated architecture that supports secure data management, advanced analytics and proactive natural language-driven insights, all positioned to meet the growing demand. Coming to a few more key business updates. Over the past few years, we have strategically expanded our presence across multiple countries that offer significant opportunities for technology services, driven by scale, rapid growth or both. Many of these markets, including India, have seen strong acceleration, and we continue to invest in deepening our footprint. India represents a high-growth market with substantial opportunities to deliver high-value cutting-edge work, specifically in the context of India-centric domestic opportunities distinct from the GCC opportunities. I'm pleased to share that Sandeep Kumar Saxena, a seasoned leader with over 25 years at HCL Tech, having led strategic initiatives across multiple geographies, will now lead our India business as a part of this portfolio. This would accelerate our engagement and growth in the fast-growing Indian market. Finally, on pipeline and market trends, our pipeline continues to demonstrate strength and sustained growth across business segments, verticals and geographies. While uncertainties persist in the global market, leading to slow spending growth on traditional offerings, -- the fundamental demand for technology as a driver for business transformation remains structurally intact. We see strong demand for Gen AI agent across the portfolio and is getting embedded in every deal. In addition, we see very good demand for advanced AI capabilities like physical AI, AI factory, et cetera, that are well linked to the CapEx spend in the AI space. While traditional discretionary spending areas have slowed, opportunities are emerging in newer pockets like this in establishing and managing AI infrastructure where discretionary investments continue. We are performing well here and would see strong growth going forward as well. I also believe there is little value in waiting for either historical or anticipated discretionary spending to resume. Instead, the focus should be on proactively identifying where new spending is occurring and targeting those opportunities like what I just mentioned. Capturing such opportunities in this environment demands a high degree of creativity and innovation and should be aligned with where the money is moving today rather than where it used to be. We at HCL Tech are always working to address such evolving trends, and I'm confident we would do it well in this cycle as well. Now I would request Shiv to walk you through more details on the numbers and the updated guidance. Over to you, Shiv.

Thank you, CVK. Good morning, good afternoon and good evening to all of you. Thank you for joining our Q3 financial year '26 earnings call. Let me walk you through our financial performance for the quarter, starting with the revenue performance. Total revenue for the quarter is $3,793 million, a growth of 4.2% quarter-on-quarter and 4.8% year-on-year in constant currency terms. Services revenue for the quarter came in at $3,379 million, a growth of 1.8% quarter-on-quarter and 5% year-on-year in constant currency terms. Our IT-based services grew 1.5% quarter-on-quarter and 3.8% year-on-year. The ERS segment grew 3.1% quarter-on-quarter and 10.8% year-on-year in constant currency terms. Software revenue for the quarter is $425 million, a growth of 28.1% quarter-on-quarter and 3.1% year-on-year in constant currency terms. In terms of geographies, during the quarter, U.S.A. grew at 1.5% year-on-year. Europe grew at 4.6% year-on-year, while India grew at 15.8% year-on-year and rest of the world reported an increase of 22.1% year-on-year in constant currency terms. In terms of verticals, our Q3 growth was broad-based with 5 out of 7 verticals registering year-on-year growth. Growth was led by 2 of our largest verticals, financial services and technology, up 8.1% year-on-year and 14.1% year-on-year, respectively in constant currency terms. On a sequential basis, the growth in this quarter was driven by manufacturing, up 4.1% quarter-on-quarter, retail and CPG up 5.8% quarter-on-quarter and public services up 3.7% quarter-on-quarter in constant currency terms. Now an update on clients. Our relentless focus on serving our customers has helped us grow our client relationships. On a year-on-year basis, we added 1 client in the $100 million category, 3 clients in the $50 million category and 15 in the $20 million category and 20 million in the 10 million category. HCLSoftware business continues to progress in the right direction as clients choose us for the increasing relevance of our products for the digital economy. Let me now share an update on profitability. Our EBIT is at $704 million at 18.6% of revenue. Net income for the quarter is at $537 million at 14.2% of revenue. EBIT and net income exclude the onetime impact of new labor costs. Including the same, the Q3 EBIT is at $595 million and net income is at $455 million. If you were to adjust for the restructuring expenses of 80 basis points this quarter, our Q3 margins are at 19.4%, just 13 basis points down year-on-year. This should address concerns around underlying profitability of our portfolio. We have consistently maintained that our focus on industry-leading growth is intertwined with disciplined approach towards margins, and our Q3 results are a testimony to that. In terms of margin bridge, our company margins have increased by 111 basis points quarter-on-quarter from 18.6% to 17.5% in the previous quarter. The improved profitability for the Software segment gave us 118 basis point benefit. For services, the 7 basis point quarter-on-quarter decrease were driven by following factors: Project Expense helped us to obtain 104 basis point gain from higher utilization during the quarter. Wage hike impact was 80 basis points. Furlough seasonality impact -- impact was 45 basis points and ForEx gain from INR depreciation gave us a positive 40 basis points. Restructuring expenses had an incremental impact of negative 26 basis points in the quarter. Now moving on to the return on invested capital, ROIC. Our ROIC continues to improve, thanks to our ongoing focus on profitability and efficient capital management. The last 12 months ROIC is at 39.4% for the company, up 277 basis points year-on-year and services ROIC now is at 45.9%, up 117 basis points year-on-year. Software continued to improve with ROIC at 23.1%, up 513 basis points year-on-year. Let me also now share the details on our strong cash generation. Over the last 12 months, operating cash flow is at $2.5 billion, while free cash flow amounted to $2.35 billion. Operating cash flow to net income conversion is healthy at 127% and free cash flow to net income is at 120%. The balance sheet continues to strengthen with gross cash at $3.82 billion and net cash at $3.55 billion. Our total DSO, including unbilled, is currently at 81 days. an increase of 3 days quarter-on-quarter due to seasonality in the software business. For our shareholders, the diluted EPS for the last 12 months came in at INR 63.35, which is up 0.7% year-on-year, including the impact of new labor code. The diluted EPS is INR 60.70. The Board has declared an interim dividend of INR 20 per share for the quarter and the record date is 16th of January and the payment date of the same shall be 27th January '26. That brings our last 12 months payout to INR 54 per share, effectively distributing 88.8% of our net income. Now an update on guidance. On the back of a standout quarter and sustained growth momentum, we are raising our full year services revenue growth guidance to 4.75% to 5.25% in constant currency terms and the company level guidance to 4% to 4.5% in constant currency terms. We remain on track to deliver on our full year EBIT margin guidance of 17% to 18%. Please note that our guidance does not include contribution from the 3 recently announced acquisition, Telco Solutions business from HPE, Jaspersoft and Wobby. The margin guidance is inclusive of the restructuring cost, but excludes the onetime impact of the new labor code. That's all from my side for now. And I would like to hand over the session to our moderator for a Q&A session.

[Operator Instructions]. Our first question comes from the line of Abhishek Pathak from Motilal Oswal.

Congrats on another good quarter. So I've got a couple of questions. Firstly, when you talk to clients right now versus exactly this time last year, what differences do you see in conversations? I mean, are we moving towards sort of more serious discussions around AI implementation? What is impeding clients from getting there? Are they indicating that some foundational work will begin maybe in the next 3, 4 months? Just trying to understand the color Y-o-Y and how it's different, let's say, versus the same time last year. That's one. And second question and related, of course, is which service lines do you think is the client coming in and saying that earlier, we were constrained by budgets, but now that AI is helping us immensely, we can sort of really unlock and maybe do a lot more of something we weren't doing at all, right? That's the second question. And lastly, for Shiv, if you can provide a brief update on how much more restructuring charges are pending and number on the SG&A investments as well, whether they should continue into 4Q? Or how should we sort of model that in?

Yes. Thank you, Abhishek. So let me take the first couple of questions, then I'll hand it over to Shiv. On the AI conversations last year to this year, definitely, there is a lot more holistic conversation on how AI would change the entire organization. I think last year, we were still talking significantly about point solutions and trying to prove that AI can deliver some meaningful value. But then after that, the conversations change to how clients should be focusing on some of the foundational elements like data and the cloud migration and all of that. But I think this conversation has matured to an extent that clients realize that to really get holistic benefit, they need to kind of completely reimagine their business processes. So I think once that realization is there, then the deployment of AI also slows down a little bit because clients want to take a holistic approach. However, the biggest area where we are seeing good outcomes and good client interest is really delivering an accelerating software development, data life cycle management, I think that area is undisputedly the sweet spot for generative AI to be most helpful for a lot of organizations. The other broader enterprise adoption for business processes, I think that is going to revolve around significant process transformation. So to that extent, it is a little bit muted. Now where clients are talking about more and bid service line. So I think if you really see the enterprise adoption and revenue and spend from that perspective is still not very high. It's still very, very small. The real acceleration in what we are seeing is not necessarily in deploying AI within enterprises, but really day minus 1 services, which are really foundational for enabling AI, like a lot of work in our engineering services. like I mentioned about custom silicon for edge inferencing is a big area where a lot of companies which are across multiple industry verticals. This is not restricted to semiconductor industry. Everybody who's got products and solutions, if they needed to use the regular GPU kind of architecture for edge inferencing, it's going to be unviable. So they're looking at custom chips to be a big spend area to really reduce to really get the best ROI out of the AI spend. And similarly, for a lot of technology companies, the AI factory, which is largely the AI data centers, the professional services around design, implementation, operations, support managed services. We talked about a large client who's a top 10 technology company. They continue to expand as their CapEx spend is expanding. We have acquired another top 10 technology company for the same AI factory services. So those are the areas, which are really day minus 1 of AI, that's really where we are seeing very good traction, especially for advanced AI services. And for the question on the restructuring?

So Abhishek, if you recall, we have indicated that for the full year, we will have an impact of 50 basis points on our margins. This is a one-off restructuring cost this year. And we expect the similar kind of impact in Q4 also. Our endeavor is to finish this exercise by Q4 and start the new financial year on a clean state. I think that's where we are. So I expect a similar kind of charge in the Q4 also. And, yes, on the SG&A part, we will continue to invest on the AI solutions as well as on the GTM. So that will continue for us.

Got it. Thank you and all the best.

Thank you.

We have our next question from the line of Ravi Menon from Macquarie.

Congrats on the good quarter. Just wondering about the retail vertical performance. Seasonally, normally, Q3 is not great for retail, but this quarter you've shown really strong performance. And you also talked about a mega deal win there. Has that already started contributing this quarter?

No, there is no contribution from the mega deal this quarter. It will start ramping up in the current quarter. And retail is really coming from a number of wins in a couple of large clients, where we have won business in the previous quarters, they are getting into execution.

And you've also seen, I'd say, Q3, there was good performance in the software segment last year, we had, I think, had a slight decline year-on-year for software products. So is this a sign that customer spending is starting to pick up again on annual maintenance contracts and stuff like that? And does that also mean a bit more, I'd say, user spending, but actually, they're starting to open up wallets again for IT spending?

I don't think this is reflective of broader IT spending. I mean, of course, we have the seasonality, which has driven strong growth. And definitely, there is a very strong demand for data intelligence portfolio Xenia, coupled with Actian's existing portfolio, definitely is a very compelling offering, and we are able to replace several of the incumbents, and we have some good success stories. So that is scaling up. And overall data portfolio continues to do very well. And another very significant couple of wins was also on our marketing automation platform, especially with the clients who are looking at sovereign kind of solutions rather than a public cloud solution. So I think those also contributed to some meaningful wins.

One last one for me. With such strong deal wins over the last 9 months, why is the guidance still implying a slight decline in the lower end of the guidance for Q4 for services?

So services guidance, lower end, of course, we have to give a range, right? We can't give such a precise range. So we took a 0.5% range, which I think is very, very reasonable. So that's where we landed. We have certain calculations, which leads to the guidance, which is optimistic, pessimistic and all that. And then after that, it gets rounded to some reasonable number. So that's where we are.

The next question is from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management Company.

Congrats on a great quarter. My question is that the existing data center infra has to be repurposed or upgraded for AI use cases like influencing our model training because of the capacity constraints globally. So how does that feed into demand for our IMS segment and when you talk about day minus 1 kind of opportunity, is this already playing out in some form and fashion.

Yes. I think it's a very significant opportunity for our infrastructure business. We believe in the next 5 years, the entire installed base of private data centers, will get technology refreshed. However, we haven't started seeing much of traction yet on that front. But we -- this is something we expect and that will be a good growth driver. The day minus 1 on infrastructure business is largely with the technology companies who are building planet scale data center capacities to really support their AI workloads. That's where we are seeing. That's why I call it a day minus 1, which is really infrastructure required to enable AI. And also there is definitely some traction in on the edge as well. So that is also an opportunity in the AI factory offerings.

Got it, sir. And just one question on margins to Shiv. R&D, I think while it has shown very good growth, the sequential margin drop seems to be a bit unsurprising. Is that largely because of the restructuring cost going into that head?

Yes. So that's correct. If you take out the impact of restructuring costs, then the margins were 17.6% versus 18% last year's comparative margins. And this quarter, there is around 90 basis point impact of wage hike we have given and also another 30, 40 basis points of furloughs. So that's what caused the slight dip in the margins.

The next question is from the line of Vibhor Singhal from Nuvama Equities.

Congrats on a very solid performance in a seasonally soft quarter. CVK, my question was mainly on the manufacturing vertical. This vertical has been under the tariff uncertainty as well as I think the auto vertical has also been basically facing a lot of headwinds, both and for entirely different reasons in U.S. and Europe. How do we see this -- I mean, how has the competition been in this vertical with the clients? So if you could maybe break up your answer into 2 parts. One is the non-auto part of the manufacturing. How is that looking? Do you expect the tariff uncertainty to come down and maybe growth to pick up in the coming quarters? And then secondly, on the auto subvertical, how are we looking at it? And do you think the pain is going to continue in terms of the EVR option for the challenges that the auto OEMs are facing in different geographies?

Yes. So in the manufacturing vertical, of course, we have 3 major components. One is the mobility vertical, which is the auto and travel transportation. The second is the traditional industrial manufacturing and third is aero and defense. We are seeing good traction in aero and defense, and that has contributed to some of the growth. In the mobility segment, especially in the engineering services, we are seeing kind of stability coming and -- but it's still a little early to call out if there is a secular growth in this segment. That's all I want to call out.

The traditional engineering segment that you mentioned, the manufacturing part of it?

Yes, manufacturing, I think it's still a little bit muted, I would say.

Got it. And the tariff uncertainty would still be there for most of these companies.

Yes. Yes.

Got it. Got it. Sure. That's great. Just one my last question to Shiv. Shiv, you mentioned that we are looking to basically take the entire impact of restructuring in Q4 and a similar kind of impact can be seen as we saw in this quarter. So beyond that, are we basically looking at possibly going back to over 18% to 19% margin guidance range in FY '27? Or would you like to maybe whatever take this comment later on in Q4?

So I think as regards to O&D, the performance is concerned, if we normalize the restructuring cost, then the margins were 19.4%, versus 19.5%. That's a very all decide that structurally, there's no issues with the margins. But for the next year, we would like to wait -- maybe we'll update you on what sort of the guidance you want to give, but I would not like to call out the margins for next year now.

Got it. Appreciate your comment on that. That's all from my side. No further questions from me. Wish you all the best.

Thank you.

The next question is from the line of Sandeep Shah from Equirus Securities.

Congrats on a very strong set of numbers across many attributes Sir, the first question is in terms of commentary about ACV being highest in the 4 years, as well as if I look at your services growth guidance on the 4Q exit at the upper end, you will have a strong exit in services in Q4 of this year versus Q4 of last year. So I'm not asking for a guidance, but if there are no further macro negative directionally, you believe the organic services growth could be better in the next year versus last year. And just related to that, this can also flip clients try to increase the investment on the AI adoption more on system integration phase rather than just on the CapEx side?

Yes, I mean, as you would see, we are on track to be the fastest-growing large-cap services company for the fourth year running. Our all-weather portfolio continues to deliver capturing the pockets of discretionary spend available in the market. And we remain very confident to meet the ever-changing needs of our clients during this exciting times. Would FY '27 see faster growth than this year, let's wait until April to see where we are able to end the year. And then we can discuss. And what was the second part of the question? Yes. Of course, the integration -- I mean, right now, we are looking at a lot more traction in day minus 1 and some service offerings across all verticals and some very specific to the tech vertical. But the general AI adoption trend is there across the board, and we see that incrementally growing as clients really make up their mind to holistically transform their business processes. That's when this trend will be really meaningful. Otherwise, it will be largely traditional deals, but really fueled by AI-led transformation of the IT operating model, software development, later life cycle management. That's where -- that is the biggest differentiator, which is driving some better wins. In fact, all the 4 of our largest deals were by our AI Force 2.0 agentic platform. So that's where we are heading.

Yes. Sir, just last couple of questions. In terms of TCV last quarter earnings, you said you target now $10 billion new business TCV, which could have some volatility on Q-o-Q. And you have also closed $3 billion in this quarter, last quarter on $2.56 billion, so looking at the pipeline and the closure, you still believe plus or minus $ 2.5 billion could be a new normal going forward, at least in the near term for quarter.

See, I mean, as you called out, these bookings can be spiky. And if you take our last 4 quarters, we have delivered $10 billion plus net new booking, I think $10.4 billion or something. Now I would not really call out that every quarter, we are going to go above $2.5 billion. But if you take some kind of a moving average over 3 quarters, 2 quarters, then I think we should be hitting that number. That's what I expect so.

Okay. And sir, the last question.

Sir, sorry to interrupt, we request you to please rejoin the queue if you have further questions.

Just last question, if you allow me?

So would you like to go ahead and take the question?

Yes.

Sir, just last thing on the press conference, we have said the incremental recurring impact because of the labor law could be now just 10 or 20 bps. So that means the further hit on a recurring basis may not be higher than 10 or 20 bps. Am I wrong in understanding this?

No, your understanding is correct. We have already taken the charge -- one-off charge in the P&L. And going forward, we don't expect this to be more than 10 to 20 basis points on a year-on-year basis.

Barring any further changes in their labor for regulation. Some of them are still pending clarifications and things like that.

[Operator Instructions]. Our next question is from the line of Manik Taneja from Axis Capital.

Yes. So CVK, I just wanted to pick your thoughts with regards to the demand around legacy modernization using AI. Are you seeing -- this segment is a significant interest from customers across verticals? And how do you think this contributes to growth over the possible future?

Yes. As I said, in modernization and DLC is where the biggest opportunity is really there in the enterprises. And we are seeing good demand. I mean, obviously, these projects also clients take one segment of modernization, see the success of that and then continue to scale. We think this will really become a very big opportunity if you take a next 2- to 3-year window, legacy modernization using AI will be a very significant opportunity across most verticals. I mean, some verticals are a lot more enterprise ERP and SaaS type of large footprint is around that. But there are certain verticals financial services, telecom, health care, who are all on mostly custom software, I think this will be really a significant opportunity.

Our next question is from Nitin Padmanabhan from Investec.

Wish you very happy New Year. I had a question related to the products business. So this quarter, after many, many quarters, we have seen the perpetual license upfront sort of see significant revenue accretion. Usually, that's been on a downtrend as we shifted to subscription, I wanted your thoughts on how we should think about any change in strategy or this was opportunistic, yes just your thoughts there.

Actually, you should compare the perpetual license revenue in December last year to December this year. It's only a marginal uptick. So usually, seasonality is there and some clients their incremental quantities. If there were a hell bent on continuing on the perpetual license, so we continue with that. And this time, we saw one client who really wanted it to be perpetual sovereign type of requirement, which helped this revenue go a little higher than what it was last year December. I think it was $48 million, which has become $55 million. Otherwise, our general approach is to minimize perpetual and convert as much as possible to term and subscription.

Got it. And 1 last on the products is will Actian be amongst your top 3 products right now by revenue broadly?

Yes, of course.

Thank you. Ladies and gentlemen, we will take that as our last question for today. I would now like to hand the conference over to Mr. C. Vijay Kumar, CEO and MD, for closing comments. Over to you, sir.

Yes. Thank you, everyone, for joining our call. I know it's late in the evening. I really appreciate all of you taking time to join. We continue to remain quite confident of the growth trajectory. We've delivered 2 outstanding quarters. We've delivered very good booking and we have a strong pipeline. So we remain optimistic about the overall progress, overall growth potential of our business. And we look forward to talking to you in the subsequent calls. Thank you very much. Have a good evening.

Thank you. On behalf of HCLTech, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.