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HCL Tech posted a weak operating performance in Q4. Revenue fell 3.3% QoQ CC on delay in the procurement decision in March and the usual software seasonality. The Services revenue decline was mainly due to reduced discretionary spending in telecom (particularly at 2 large clients) and discontinuation of 2 SAP programs. EBITM fell by 200bps QoQ to 16.5%, missing our expectation of 17.5%. HCLT generated >USD155mn in advanced AI revenue (~4% of revenue; 6.1% QoQ in CC), driven by scale-up of AI deployments. For FY27, HCLT has guided for overall CC revenue growth of 1- 4% (implying 0.4-1.6% CQGR) and Services CC revenue growth of 1.5-4.5% (implying 0-1.2% CQGR), with EBITM band of 17.5-18.5%. The guidance factors in ~50bps growth headwind from 2 client-specific issues (manufacturing, retail) and weakness in discretionary spending in large telecom clients, while excluding contributions from Jaspersoft and the HPE Telecom acquisition. The mgmt indicated AI deflation has not significantly impacted FY26 growth, but the impact is expected to increase from FY27 and weigh on guidance. We cut FY27/28E EPS by 3.0 /2.2%, factoring in the softer Q4 and FY27 guidance along with potential delay in closure of acquisitions. We expect the stock to remain under pressure in the near term due to the Q4 miss and weaker than expected guidance. We retain ADD on HCL Tech with TP of Rs1,450 at 18x Mar-28E EPS.

Result summary

Revenue declined 2.9% QoQ (down 3.3% CC) to USD3.7bn, below our estimate of -1.6% CC QoQ. Among segments, the Software business declined 28.1% QoQ in CC terms due to seasonality; ER&D Services dipped 1.3%, while IT Services was flat. EBITM declined by 200bps QoQ to 16.5%, below our expectations of 17.5%, driven by software business seasonality and delayed client decisions (-181bps), with Services margins dropping by 27bps due to increments (-45bps), restructuring (-41bps), and higher bad debt (-19bps), partially offset by Project Ascend (13bps) and forex (65bps). Services revenue growth was mixed: Technology, BFSI, and Public Services rose 4.4%, 1.6%, and 1.3% QoQ in USD terms, while Telecom, Retail, Healthcare, and Manufacturing declined 3.0%, 1.8%, 1.2%, and 0.9%, respectively. Headcount increased 0.4% QoQ to 227,181. HCLT announced a dividend of Rs24/sh. What we like: Strong growth in the Tech vertical. What we do not like: Operating performance miss in Q4; weaker than expected FY27 guidance.

Impact of AI on HCLT and broader industry

The mgmt has segmented the market into three categories based on the AI impact:

1) ~40% of current enterprise spending is toward the ‘AI-disrupted’ segment (traditional application, infra services) facing pricing deflation. This segment could shrink at 3–5% CAGR over the next few years, and eventually become 25% of enterprise spending.

2) ~55% is ‘AI-amplified/augmented’ (data, cloud, security, platform engineering), which is expected to grow ~10% and where AI acts as a growth accelerator.

3) Remaining ~5% is ‘AI-native’ (AI factory, custom silicon engineering), growing ~30%. Based on its portfolio, it expects an estimated ~2-3% drag on HCLT’s overall revenue.

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