HCL Technologies Limited (HCLTECH) Earnings Call Transcript & Summary

Ladies and gentlemen. Good day, and welcome to the HCL Technologies Limited Q1 FY '25 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, Darwin. Good morning, and good evening, everyone. A very warm welcome to HCLTech's Quarter 1 FY '25 Earnings Call. We have with us Mr. C. VijayaKumar, CEO and Managing Director, HCLTech; Mr. Prateek Aggarwal, Chief Financial Officer; along with the broader leadership team to discuss the performance of the company during the quarter, followed by 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 on 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 read 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 evening, good morning, and good afternoon, everyone. Thank you for joining us today for our Q1 earnings call. I will directly get into our business performance for the quarter. As we have communicated, seasonally, Q1 has always been a soft quarter for HCLTech. It's still industry-leading Y-o-Y growth as it increased 5.6% on a year-on-year basis in constant currency, though our revenues declined 1.6% sequentially. Again, this was better than how we had expected this quarter to pan out when we met last. We have called out the key factors that drove this during the last call. Operating margins flopped in at 17.1%, a decrease of 50 basis points compared to the last quarter and an increase of 13 basis points compared to the last year same quarter. In terms of segmental performance, our Services business declined 1.9% sequentially, grew 5.8% year-on-year in constant currency. Our IT and business Services grew 5.3% year-on-year, declined 1.5% sequentially in constant currency. Our Engineering and R&D services grew 8.4% year-on-year but declined 3.5% sequentially in constant currency. The decline in Engineering Services was primarily in the manufacturing and MedTech vertical segments. HCL Software grew 3.5% year-on-year as well as 0.4% sequentially in constant currency. Our HCL Software business continued to progress in the right direction with annual recurring revenue at $1.01 billion. Now coming to the verticals and geographies. In terms of geographies on a year-on-year basis, Europe grew 3%. Americas grew 8% but rest of the world declined at 3.6% in constant currency. On a year-on-year basis, telecom and media and retail and CPG vertical segments fared well, growing at 69.2% and 9.7%, respectively. Manufacturing grew 3.5% year-on-year in constant currency, enabled by the ASAP acquisition, which we did last year. Life Sciences and Healthcare segment declined 4.1% year-on-year in constant currency due to completion of projects last year and the softness that I called out in the MedTech segment. Bookings during the quarter, we had a TCV of $1.96 billion, approximately $2 billion with a good mix of small deals and large deals. We've called out all the large deal wins in our investor release, and we've also called out a number of opportunities that we have won in the space of gen AI in our investor release. From a people perspective, our overall people count at the end of the quarter was 219,401, a sequential reduction of 3.6%, which is largely attributed to the State Street daily exit. Our attrition continues to update on a LTM basis. Our IT Services voluntary attrition now stands at 12.8%, one of the lowest in the industry. Expanding on a new risker strategy. This year, we also opened -- this quarter, we opened a center in Patna in Bihar continuing to expand our New Vistas strategy. In terms of business trends and gen AI, we continue to see a lot of engine-related opportunities. We have launched HCLTech AI Force and generative AI and automation platform a couple of months ago. And now we've launched another suite of products, HCLTech Enterprise AI Foundry to simplify and scale enterprise rail journeys. Talking about client programs, there are multiple ongoing engagements where we are working with clients to deliver real value. Specifically, in terms of AI-led wins the following are worth a mentioned: A global technology major selected HCLTech for implementing a gen AI-based solution for gaming review analysis that automated data collection, sentiment analysis and operational automation, resulting in significant workload reduction and a 119% increase in game reviews. They also selected us to deploy gen AI to transform their content lifecycle management and the processes. HCLTech will help the client to automate its content processing with intelligent features such as personal filters. Our Europe-based financial services major has partnered with us to develop and manage its next-gen low latency electronic trading platform and compliance analytics platform leveraging Gen AI. Our U.S.-based insurance provider selected HCLTech to transform its contact center and back office operations for claims management leveraging gen AI. HCLTech AI Force DigitalCOLLEAGUE suite of products will help the client optimize workflows, boost operational flexibility and enhanced efficiency, accuracy and overall service quality in managing healthcare claims. Adoption of gen AI technologies are also expected to boost the demand for cloud services and data standardization work. Recent implementations that we did demonstrate that trend. It delivers the business efficiency and operational excellence for clients who are seeking several modernization kind of objectives. For a leading athleisure brand, we modernize their e-commerce platform to improve omnichannel consumer experiences, and that spurred their top line growth. For a U.S. beauty retailer, we created a digital store of the future, digital shopping experience that's high-performing, visually appealing, immersive in omnichannel. Both implementations involve migrating from legacy systems to next-gen platforms that enable innovation, reduce OpEx and scale on demand. This should logically lead to the next phase of leveraging gen AI further. This gen AI momentum is driven by the effectiveness of our full stack proposition, which delivers to the entirety of the enterprise covering business processes, product applications, data, cognitive infrastructure and the semiconductor design. These full-stack capabilities are key in the market right now and the flagship offering of AI Force and AI Foundry along with a global network of gen AI labs are bringing them to life for our clients across the globe. We are, in fact, seeing unprecedented levels of activity in our AI labs, which provides strategic advisory services, hands-on engineering acceleration and a unique ideate to MVP experience designed to quickly prepare clients for scaled AI deployment. Our AI labs have curated 200-plus MVPs for our clients today. Fueling these activities are solid investments in people, places and partnerships. In terms of people, we have a target of training 50,000 people on gen AI and AI skills this fiscal. 33% of this target has already been achieved in this quarter alone. Our focus on data AI, gen AI's developer skilling across the stack with a special focus to create a cohort of data in AI and principles. In terms of locations, this quarter, we inaugurated an AI lab in New Jersey in the U.S. and the gen AI dedicated data center in Austin, Texas. These labs help clients quickly innovate, experiment and prepare for scale production deployment of AI and gen AI-enabled solutions. We've also recently announced a new collaboration to establish a gen AI CoE based on IBM watsonx AI and data platform. In terms of partnership, our expansive ecosystem of partners continues to be a bedrock of growth in this market. We have steady partnerships with all the leading microscalers, ISVs and system OEMs that keep us at forefront of key innovation happening in this space. In a software business to similar acceleration is offered around gen AI. Every major product in HCL software portfolio has now been embedded and infused with GenAI capabilities from business applications to total experience to intelligent operations, cybersecurity and data analytics. Our investor release has got more details of the deals that we won both on GenAI and other digital and traditional themes, which should give you a much broader view of the potential opportunities in front of us. Last quarter, we received several accolades. I'm happy to share that HCLTech has been included in business world, India's Most Respected Companies 2024 list as #7. HCLTech named Most Honored Company in India in Annual Asia Executive Team survey by the Institutional Investor Research. HCLTech ranks #1 in 21 categories in the Technology IT Services and Software Sectors, and had a total of 27 top 3 rankings across Asia ex-Japan and Rest of Asia, ex-Mainland China survey tracks. And I'm sure you know most of these details. I would like to thank you all for the continued support. These awards would not have come to our way without you and your industry peers, acknowledging our work and commitment to strong corporate governance and investor relations. A sincere thank you to all our investors and analysts for their acknowledgments. From an ESG perspective, we also won a few recognitions this quarter, the British Safety Council has recognized 5 of our campuses in India with the prestigious International Safety Award 2024. We also won the Equinix APAC Social Governance Award and SAP Pinnacle Award in Social Impact category for the HCLTech AquaSphere solution that helps enterprises achieve their water conservation goals. Looking ahead, with Q1 performance in line with our expectations, we will grow in Q2 with all verticals and geographies, seeing a sequential growth, except financial services. As you know, we shall have the planned impact of Stage 3 divestiture on our revenues in Q2. And including that impact, we remain comfortable with our full year revenue and margin guidance as client spend on GenAI and other emerging technologies. We expect to meet this guidance through strong operational execution that we've demonstrated over the last several years. With that, I will hand over to Prateek to provide more details on our financial performance. Over to you, Prateek.

Thank you, CVK. Good morning and good evening to all of you. I hope you are keeping well. So the Q1 FY '25 overview revenue stands at 3364 -- $3.36 billion, which is a decline of 1.6% sequentially but a growth of 5.6% year-on-year in constant currency terms. This quarter, it was led by the Software segment, which was up 0.4% sequentially and 3.5% on year-on-year terms in constant currency. And ARR stands at $1.01 billion. Services came in at $3,041 million, so $3 billion roughly, which is now 1.9% sequentially and up 5.8% year-on-year. Within that, ITBS came in at $2.5 billion, down about 1.5 percentage points and up 5.3% year-on-year. And we are indeed in down 3.5% sequentially and up 8.4% year-on-year. Our EBIT came in at $575 million at 17.1%, which is down 50 basis points sequentially. But up 13 basis points year-on-year, like CVK mentioned already, typically, Q1 has that seasonality for us. Services margin is the one that drove the overall margins down on a sequential basis, 51 basis points and up 43 basis points on a year-on-year basis. And net income for the quarter is $496 million, which is at 14.7% in U.S. dollar terms, which is an increase of 3.4% sequentially and 15.3% year-on-year. Our other income, as you would have noticed, is higher due to the divestment of the State Street DPO JV in this quarter. I would like to highlight one thing, which is a little unique in this quarter compared to most other quarters or years, is the divergence between the net income in dollar terms versus in rupee terms and that is driven by the accounting of the divestment of the State Street DPO JV. What I am specifically referring to is the 15.2% net income in rupee terms in our year Ind AS financial statements, which is a divergence of about 43 basis points. In decimal terms, it's 14.7% versus 15.2%, vis-a-vis, the IFRS, which is at 14.7%. this is basically because of an accounting difference between how the recording of the initial investment in the entities that were divested got translated -- currency translated over the 12, 13 years of the life of the JV, it's typically refer to as CTA, currency translation adjustment. So in the U.S. dollar P&L, there is about $9.8 million, which was a loss in the U.S. dollar P&L. But the same thing in the rupee P&L, the Ind AS P&L, there is actually a gain of $4.7 million. And therefore, there is a $14.5 million difference if you just translate the rupee P&L would be higher by $14.5 million on that account. Moving on to the normal EBIT margin walk. There's not much to see there. It's pretty straightforward. 15 bps is decrease at the company level, which is obviously caused by the drop in the Services margin, which is at 51 basis points. And that is basically, the dock in margin is from the ER&D segment, which is -- the drop in revenue has kind of percolated down to the margin, if you look at it that way. And so that is really the reason for the drop sequentially Q-on-Q. The impact of annual productivity that has resulted in revenue declines has been off-set by efficiencies in business. And along the way, we got some small exchange benefit of about 10 basis points as well. We continue to improve our return on invested capital, ROIC due to continued focus on profitability and managing capital efficiency. And the last 12 months, ROIC, you will see is now at 42.8% for services, which is a handsome increase of 3.8 -- 4.8% on a year-on-year basis, and software continues to be at 16.1% like last quarter. And -- but therefore, the company as a whole, the last 12-month ROIC is at 34.6%. This is also an increase of 3.5 percentage points on a year-on-year basis. The guidance remains the same as what we had given you at the beginning of the year, last quarter when we announced and revenue guidance continues to be 3% to 5%. And like CVK mentioned, we have confident of seeing growth despite the 80 bps impact at a company level from the State Street DPO revenue going away, and which is about 90 bps at a Services level. We do expect to see growth in Q2 over Q1, both for total company and for Services, we continue to have that guidance band of 3% to 5%, and EBIT between 18% to 19%. Our cash generation continues to be robust. Last 12 months, operating cash flow is at $2.7 billion, which is 9% increase year-on-year. And free cash flow is at $2.6 billion, which is an increase of 12% year-on-year. And the respective conversion factors compared to net income are respectively 139% for OCF and 133% for free cash flow. Our balance sheet continues to strengthen. Gross cash at $3.26 billion now and the net cash just a shade below $3 billion at $2.985 billion. We succeeded to reduce our DSO by another day, including unbilled. It is now at 82 days versus 83 days last quarter. So that's an improvement of 1 day sequentially and an improvement of 6 days on a year-on-year basis because it was 88 in the same quarter last year. For our shareholders, the diluted EPS for the last 12 months, therefore, comes in at INR 60.52, which is up 8.7% year-on-year. And the Board has declared a dividend at INR 12 per share for the quarter, interim dividend, which is in keeping with what we have been doing in the last -- in the Q2 and Q3 of last year as well. We're maintaining the same run rate. The record date for that is going to be 23rd July, and the payment of the same shall be first of August for the shareholders. That brings our last 12 months payout INR 54 per share, which is a ratio of 89% to the net income. And that's where I will pause and moderator back to you for the Q&A. Thank you.

[Operator Instructions] The first question is from the line of Vibhor Singhal from Nuvama Equities.

CVK, I just had 2 questions. One, I think the -- this quarter, the decline as we had already guided to, we were expecting a decline in revenues because of the project moving from on-site to offshore. But adjusting for that, how is the BFSI segment looking like? How is the growth overall in this segment in terms of the pickup in demand? Or I mean, we've had a very strong BFSI performance last year. Do you expect that momentum to continue or maybe even get better, I mean, depending on how the market plays out? And a similar commentary in fact, that if you could provide on manufacturing. If I missed that comment, what led to this decline in the manufacturing vertical in this quarter? And how do we see it going forward?

Yes. Thank you, Vibhor. Let me address the Financial Services question. We -- apart from the one item that we had called out last quarter, the progress played out exactly as we had expected. The -- and as you know, Q2 will have a little more impact because of the State Street divestiture. After that, we expect this to show some growth because the couple of wins that we've had -- big wins that we've had in the quarter was in Financial Services. They will start contributing to incremental revenues in Q3 and Q4. And still, the large outlook in Financial Services seems to be cost efficiency kind of driven programs but a lot of them are not just straight forward cost efficiency. It is led by a level of modernization and tech transformation. So that's what we are seeing in Financial Services. We're not seeing the general discretionary spend really picking up. It remains somewhat similar to what we saw in the last quarter. In Manufacturing, first of all, addressing the Q1. We have talked about 2 elements of the Q1 outlook. One was, of course, offshoring of a large program. The second one was a traditional year-on-year productivity. A lot of them, the contract here and the productivity kicks in, in April. And this is a little more concentrated in the manufacturing vertical. So that was one reason. Second, we saw, in fact, a significant weakness in the automotive segment, contrary to all the expectations because we see a lot of test with the automotive firms in Europe, and that has contributed to the second element. And the third, which is -- it's mostly a BAU thing. Our asset revenue, if you see, has declined some 10-odd million and pretty much all of that seems to have happened in the Manufacturing vertical. Now moving forward, as I mentioned, we see good growth in manufacturing in the second quarter. So we should continue to see good traction in Manufacturing henceforth.

Got it. So apart these 3 things that you mentioned, the overall outlook in the Manufacturing remains as it was, let's say, last year?

That's right.

Got it. Got it. That's really helpful. I just have one follow-up question for Prateek. Prateek, I think we would probably be taking the wage hike in due course the year, either Q2 or Q3, you can probably shed some light on that as well as to when we are planning it. But given that we are at 17.1% margin in this quarter and there is the impact of wage hikes yet to come, are we expecting -- I mean, what are the operating levers that you are looking at to be able to manage the margins in that 18% to 19% band? I know Q3 will be a bump up because of the product business. But overall, do you -- what are the other levers -- I mean even despite that seems to be a bit of all ask, what are you looking at in terms of the levers to achieve that number?

Thanks for that question, Vibhor. I think I don't want to speculate too much about the wage hike timing and quantum, et cetera, like Ram mentioned, it is still a decision which is work in progress and -- I mean, I mentioned at the press conference, I don't know if you were listening in. So that is a work in progress, which we will decide during the quarter. But at an overall level, Vibhor, there is a certain trajectory in interquartile -- quarter-wise trajectory that we have had. If you look at the last couple of years, our Q1 is typically soft on the top line, which kind of translates to the bottom line EBIT as well. And then we have Q2, which is pickup and somewhere near the number for the full year and so is the Q4 and Q3, like you rightly pointed out, is the peak. So Q1 is sort of trough, Q3 is the peak and the other 2 are somewhere [indiscernible]. And that's what we would expect to play out in even in this year. I'll leave it there because the levers, there's a long list. We've talked about it enough times and all those levers continue to be available and at play. I'll leave there, Vibhor.

Got it. Got it. That is very helpful. So in a nutshell, we don't see any threat to over 18% to 19% guidance and which comfortably place to meet that number?

Our guidance continues to be 18% to 19%.

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

So you mentioned that the performance during the quarter was better than initially anticipated. Just curious what has led to this? Was this driven by the faster velocity, shorter cycle deals, which would have come through during the course of the quarter or something else?

So it's difficult. It's a little bit contribution from a lot of things. And it's not that we have hugely over performed from our expectations. It is slightly above our expectations, and it's a lot of small things, which is added up. I wouldn't really call out any trend or anything like that.

And you seem to be confidently position that all verticals and geographies will potentially grow in Q2, with just 1 exception. So are you suggesting that the demand situation has bottomed out and seeing a gradual improvement from here on?

Yes. I mean, the only exception is Financial Services, as I have called out. And from a demand situation perspective, our going in assumption for the year was discretionary spend would be similar to the last year and we maintain the same thing. I don't think the environment has changed in any meaningful way during the first quarter to kind of project any optimism. But of course, our forecast for Q2 is based on the deals that we've won and the execution that is underway. And that's why we feel confident of growth -- more broad-based growth in Q2.

The next question is from the line of Ravi Menon from Macquarie.

CVK, just wanted to check about the Manufacturing vertical performance. Last year, despite the productivity improvements, we've shown good growth even the year before that million, there has only been a slight decline just about 0.5% Q-o-Q in CC terms. This year seems to be a lot more pronounced. Could you give us some more color on what happened in the automotive sector? And is there any decline in the ASAP acquisition's revenue specifically if you might share that?

Yes. Ravi, I think you guessed it right, our ASAP acquisition would not deliver to the way we expected in the first quarter. But we are very confident of the overall investment and the outlook in that segment. But I do believe the EV segment is going to undergo some stress due to various factors, especially in Germany. And Given the ASAP acquisition, we expect the Q2 to be good growth quarter. And if you are trying to compare it to last and other years, usually, there are lots of elements but assets is one thing, cost of $10 million kind of an impact in Q4 to Q1. And that's not something, which we can very predictable manner kind of defined year-on-year and things like that. And then the productivity benefit, it's pretty much similar. It's a repetitive thing every year. But you won't -- I mean the growth can be influenced in one year because of the new deal ramp-up and things like that. So very difficult to grow a 1-to-1 correlation, Ravi.

And Prateek, a question on the margin. Your IT Services margin seem to be falling up well with the shift offshore probably leading it but the R&D has seen a sharp decline. I mean can we recover the R&D margins very quickly? Or do you think this will take a few quarters?

I'm pretty sure we'll recover most of it pretty quickly because as you can see, it's a mathematical truth sitting out there. The costs have remained pretty much flat quarter-on-quarter, whereas there's a $20 million decline in the revenue line, which was percolated down to the margin. So sometimes that can happen when it was not kind of expected and happens during the quarter, you don't have enough time to pick the corrective reaction. I am sure they'll take corrective action during the current quarter. I'll see some growth, hopefully.

And one last question -- the last question, if I may, on the first addition. How many trainees are you planning to hire this year?

There's the full year plan for this year. We have planned for is 10,000. Q1, we added about 1,100. That's in line with what we have planned for Q1. But fresher addition through the year is always going to be something that we will plan quarter-on-quarter. We do make our plans based on what we do on campus and what we do off-campus. And off-campus is going to help us get that flexibility to moderate quarter-on-quarter to meet the demand that we have. But the going position for the year is 10,000 that we're still going with that plan.

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

CVK, the first question is any experience to share when the deals on ADM or IMS comes for renewal? And what are the clients asking for any benefits to be passed down on GenAI?

Yes. My answer may not be very popular but I will still give it. More than the expectations from the clients on GenAI, I think it's the competitive intensity, which is kind of driving some irrational behavior. That's all I would want to just say. GenAI, I think customers, especially for running production landscape, there are a lot more pragmatic in what can be done and what needs to be done with a lot more thought and in a very gradual manner. I think we are working very well. Our AI Force platform in addressing the end-to-end lifecycle of software development and application operations. And a lot of our DRYiCE solution suite is also now integrated into the AI Force platform where the earlier to machine learning runbook were getting created but now it's a lot more easier to generate AI. So that's all part of our AI Force platform. So we are committed to implement AI Force platform across all our customers as and when we get the approvals. And then from then on, it's a journey and the customers recognize that. So I would leave it there.

Okay. Okay. And Prateek, just a question in terms of the announced acquisition in May of 2024. I do agree it will take another 6 to 9 months to close and not forming part of the guidance. But are you worried it may dilute our margin substantially? And -- so it may change our comfort range on the EBIT margin at 18% to 19%, whenever it gets consolidated?

Yes, Sandeep. So our guidance is organic, both on the top line and on the bottom line. So whatever -- whenever the deal closes, like you said, 6 to 9 months from the date we announced, so that revenue is not in 3 to 5 guided range. Neither is the margin, and as far as accounting of any new acquisition goes, most of the EBITDA that comes with the acquisition gets provided as amortization of intangibles, as you know. So most acquisitions' P&Ls for the first 1 or 2 years are not really EBIT accretive or any meaningful EBIT in the first couple of years. So I hope that explained this.

So this purchase consideration would be largely allocated towards intangibles rather than tangible assets, right?

That is typically the -- I mean, intangibles includes goodwill, which doesn't amortize. So any acquisition, a substantial part, definitely more than 50% definitely goes towards intangibles.

Okay. And last question, CVK. What will it take for clients to relook the discretionary projects in terms of reducing the leaking buckets or to start the projects, which are put on paus? Based on your interaction with the client, what are events, which they expect for becoming more constructive on discretionary projects?

See, I think even now there is some amount of discretionary spend happening but for customers to be them a little bit liberal and open-minded and doing new work. I think it's largely driven by the economic pressures, whether it is interest rates or inflation and things like that. And it varies from segment to segment. So I think it's just the macro factors. I would assume our -- companies more than -- I mean while some companies have delivered very good profitability and things like that but there is still conservatism that is there, which I think will be a little -- will loosen up a little bit with some signals and some real changes in the macro.

The next question is from the line of Dipesh from Emkay.

Two questions. First about the vertical Technology and Service seem returned to good growth paths. So if you can help us understand what is driving because that vertical was relatively so for last 4, 5 quarters? Second thing is about the GenAI related thing. Obviously, we are not -- if you can give more detail about, let's say, our growth strategy and how we are -- if any different path, which we are choosing compared to some of the peers? And AI Force you said we intend to implement across client base. If you can share some statistics around where we are in that journey.

So Tech & Services, I've been kind of indicating that we were seeing some green showed certain growth coming from Tech & Services. And it helped us grow in this quarter. At this point, there are certain programs, both on the digital business side and some of the execution of some of the other programs that had 1, 2, 3 quarters ago, they are healthy. We also see a lot of momentum with the hyperscaler in enabling their infrastructure creation and support of that. We will -- we are also seeing some green shoots on the Engineering Services as well. But it didn't contribute meaningfully in the last quarter. We hope it will contribute in the next quarter. Now coming to Generative AI, I think if you look at the -- if I kind of summarize all the different use cases, one is very, very efficiently led and the second one is really innovation-led driven by the leverage of data. So our HCLTech AI Force is a comprehensive platform, which addresses all the efficiency led benefits, both on IT processes and business processes. So this is one platform if a customer can implement it within their enterprise then all the functions within the organization can leverage it to drive their efficiency programs using one consolidated platform, which is secured, which has got base to look at implementation of responsible AI and traceability of the decisions, and all of that. I think this platform is very comprehensive. And it is now -- while we started with Azure OpenAI, now it's expanded into a number of other LLMs. So I think it's going to be quite pervasive across. And I don't believe the industry has a similar platform. We definitely have an edge in this. The second aspect within an enterprise will be on the data, which is across different functions, without going anything external to the organization, all the internal organizational data, how will that being leveraged to drive generative AI programs and innovation around that. That is where HCLTech Enterprise AI Foundry really helps any enterprise AI journey, which is not just the efficiencies addressed by HCLTech AI Force and all the innovation around data is addressed by AI Foundry -- Enterprise AI Foundry. Now these 2 are leading edge, which even our hyperscale partners recognize this as a very strong offering from our side. And we've also aligned our HCLTech Enterprise AI Foundry with all the tech OEMs like Dell, HPE and others. So they also see a lot of value in this solution, especially where we need to implement a private AI stack. Right now, the implementations in maybe a dozen customers of AI Force are still early stages. I think it's all about getting the basic solution in place and then continue to drive adoption. And the adoption is going to be a multiyear journey. I hope that was helpful.

It is helpful. And just on a follow-up. In terms of, let's say, now deserve -- now customers we have for AI Force, whether there would be any immediate revenue benefit? Also, for time being focused would be about adoption and revenue may be over a period we try to monetize?

Yes. So see, I think there are 2 different opportunities. The AI Force is going to be implemented, and it's going to be more driving efficiency within the enterprise, At some point, there will be -- there is a value for the IP that we provide on an ongoing basis to the clients. Whereas the enterprise data foundry any solution that we are implementing will be -- will give us -- it's like how the small projects discretionary spend, this is going to be one more category where we will see customer spending. And right now, we do quite a bit of projects in this space. We -- I mean, double-digit TCV for 2 deals is what we have. But it's still early days. I would not extrapolate anything but some meaningful wins are happening in this space. And I believe that we have an edge over a lot of other service providers in this space.

The next question is from the line of Nitin Padmanabhan from Investec.

I had a clarification on State Street. So I think in the press conference, you mentioned that there was an impact on BFSI this quarter from Stage 3. And next quarter we should have, 0.8% impact in revenue. So, did I hear that right? Because when I see the headcount fall of 8,000 and State Street is out, the absolute headcount cost remains the same on a sequential basis. So it seems like people have left towards the end of the quarter. So the question is, one, is there any impact on revenue in the current quarter due to State Street? And should we assume that 80 bps for the whole of next quarter?

Yes, I think maybe just to clarify what we mentioned in the press conference, and then Prateek can respond to the same questions. We talked about the decline in Financial Services was due to offshoring of a large client. And that was the main contributing factors and that was as planned and as we had indicated in the beginning of the quarter. And the further details on the Stage 3 cost and revenue, Prateek will address.

So I think we covered this, Nitin, in the press conference that you referred to, there is a 80 bps at a company level and at the services level, the same translates to a 90 bps kind of an impact in Q2. That is exactly what we have told you at the beginning of the quarter -- last quarter announcement.

Got it. Got it. The second thing to clarify was, in this quarter, I think you mentioned $70 million is gain on other income due to Stage 3 but I think the consideration was $170 million. So the rest comes in the next quarter. So that was one on the State Street side. And I add another one, which is, CVK, you alluded to some weakness in Germany on the EV side. Could you help contextualize that a little better as to what exactly you're seeing? And finally, I think yesterday there was this ISG call and even on the TCS call, there was this talk about the impact of GenAI on ADM and Intra. So, when ISG put that number at around 30% of cost savings, TCS put it to 5% to 20%. Just wanted your thoughts on this because we have usually been very candid about these things. So I just wanted your thoughts on how -- what are your observations on this space?

Yes. So maybe I'll address the 2 questions on the weakness in Europe and the GenAI, ADM savings and things like that, and Prateek will address the State Street related question. Weakness in Europe was led by Manufacturing, and I did talk about what -- where the 3 items in manufacturing, the productivity and assets and softness in the automotive segment. Automotive segment, especially large automotive firms who have significant software development capability. I think due to their own current stress have ramped down on a couple of projects, which had a sharp impact in our ASAP revenue. We believe we have amazing talent and the leadership in ASAP. We need to broad base the ASAP capabilities to a global clients and that's what we are working on. And -- so I do believe this will get offset.

So are you seeing this as cuts on EV-related programs overall? Or the -- it is just specific?

Yes. I don't think it's specific, while there is definitely one specific thing but overall the EV market is -- of course, this is my perspective, it's softening. Some of the investments are getting a little bit not prioritized as it used to be. But of course, the long-term trend, I do strongly believe in it. It could be the economic pressures on some of the industrial customers is what is causing this. On GenAI, I have been fairly clear on the 4 areas and the kind of impact it will have. The first is DPO, and the testing. I believe the benefits would be to the extent of 50% and we ourselves have delivered programs -- or delivering programs, which is promising 50% saving from the current off-shore spent on DPO and testing. We have examples of both. The second aspect is in ADM. I think ADM and all the operations need to be looked at differently. In ADM, we expect productivity improvement anywhere from 10% to 30% by adoption of the group of GitHub Copilot. And the GitHub Copilot adoption journey is also very gradual journey. Usually, customers look at a cohort of maybe 100 to 200 to developers and look at all the metrics and really make sure that the productivity that is being measured, which is accrued due to the copilots and things like that -- GitHub Copilots. So all of that is calibrated, proper benchmarks made. And then that itself is so significant to change management to achieve that. And then they scale from there to a much larger 1,000, 2,000 developers kind of capacity. So this is a journey, and we believe 10% to 30% is the productivity savings that will come through even one of the most advanced companies on this, their own internal goal is to achieve 10% productivity on the software development. The third element is the operations, with infrastructure, application, operations. This is where you are normally working on live systems, which is running mission-critical applications and infrastructure landscape. So the GenAI's incremental value from the existing automation, machine learning and AI-led automation that has already existed in a very mature implementation where we've used machine learning and traditional AI technologies, the incremental benefit you would see would be in the range of 10%. That's what we expect. But cause things like service desk and things like that, which are also in infrastructure support or maybe the opportunity is a little higher. And the fourth element is all the business innovation and the data-led AI journeys, which will really be a good growth driver because these opportunities -- I mean, actually here, every application needs to be modernized with the GenAI kind of approach. And that's for the existing applications. And then even to leverage the GenAI in an effective manner, a lot of customers need to continue their modernization journey and the streamlining of data. So I think there are a lot of prerequisites that are becoming more and more important as we complete these POCs for a number of customers.

This is very helpful, CVK. And just last on the State Street question, which is pending.

Sir, sorry to interrupt. We request you that to please return to the question queue for follow-up question. The next question is from the line of Gaurav Rateria from Morgan Stanley.

The first question is for CVK. Just trying to understand all the projects that we are delivering on the GenAI, how to understand if it's all an incremental demand that is coming to us or it is a reflection of some projects being prioritized on GenAI but something else is being deprioritized? So just trying to understand if it is an incremental net positive for the industry and for us?

So I think eventually, it will be an incremental positive, especially the fourth category that I have talked about. I would think it's incrementally positive. And these spends, like I'm aware of one bank, which is looking at $0.5 billion outlay for GenAI programs. So this is something, which is coming top down. They believe it can be a very disruptive capability that they can leverage. So while that is just one example but it just gives the kind of thinking that customers are going through. Of course, from the thinking to execution to giving us the program, there is definitely a time gap. So I personally think it will create a new spend trajectory.

Got it. A related question, CVK, on the prerequisite that you mentioned that once you complete the POCs, you'll have a lot of the work coming around modernization, which would be prerequisite for companies to implement a GenAI. Does it mean that the second stage could mean a much larger project than that you have right now on POC stage and much longer engagements?

I see it like more of the cloud journey where it kept growing incrementally. That's how I see this come up.

Sorry. Last question on the....

Sorry to interrupt. We would need to end our question-and-answer session at this point. Thank you. Ladies and gentlemen, I would like to hand the conference over to Mr. C. VijayaKumar. CEO and MD for closing comments. Over to you, sir.

Yes. I apologize that we've run out of time. I'm sure you have a lot of questions. And Nitin we'll be very happy to respond to your questions as appropriate offline or in any other conversation. And thank you for joining us today and for all the interesting questions. We want to bring to your attention that on the 28th of August, we have an Investor Day planned in Mumbai, and we will get invites and we really look forward to seeing all of you during the Investor Day. And thank you for joining us, and thank you for your ongoing support, and have a pleasant evening.

Thank you.

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