Add HCL Tech Ltd for the Target 1,250 by Emkay Global Financial Services Ltd
HCL Tech (HCLT) posted a mixed operating performance in 1Q. Revenue fell 0.5% qoq CC, due to the usual seasonality in the Services business which was owing to productivity commitments in certain large managed services programs. EBITM expanded by 40bps qoq to 16.9%, missing our expectation of 17.2%. Deal wins remained healthy, with net new bookings of $2.4bn, increasing TTM bookings to $9.9bn (up ~9% yoy). The management indicated that the $1.14bn TCV mega deal transition is expected to start in a couple of months, with HCLT likely to see steady-state in Apr-27 and hence face negligible impact in FY27. HCLT generated $171mn in advanced AI revenue (~4.7% of revenue; 10.6% qoq in CC), reflecting broader adoption of AI-led solutions across existing client engagements. The company is entering the AI data-center business with an initial strategic investment of up to Rs35bn, aiming for longterm capacity of 50MW, to offer the full stack AI play and not a colo data-center. For FY27, HCLT retained overall CC revenue growth of 1-4% (implying 0.9-2.9% CQGR) and Services growth of 1.5-4.5% (implying 0.5-2.5% CQGR), with EBITM band of 17.5-18.5% (including 40-50bps impact from restructuring costs). The guidance does not include acquisitions. We largely retain our estimates; maintain ADD on HCLT with TP of Rs1,250 at 16x Jun-28E EPS.
Results summary
Revenue declined 0.9% qoq (down 0.5% CC) to $3.65bn, better than our expectations of -0.9% CC qoq. Among segments, Software business grew 2.2% qoq in CC terms, ER&D Services declined 3.7%, while IT Services was flat. EBITM increased by 40bps qoq to 16.9%, coming below our expectations of 17.2%, owing to lower restructuring expenses (+70bps), PDD benefit (+20bps), and forex tailwind (+60bps), partially offset by seasonality impact from annual productivity benefits and ERS revenue drop (-110bps). Headcount declined 1.4% qoq to 223,889. HCLT announced interim dividend of Rs12/sh. What we like: Healthy growth in the Financial Services and Retail & CPG verticals, steady deal-win momentum. What we do not like: Margin miss, weak cash conversion (~44% OCF/EBITDA).
Telecom and Tech weigh on growth
Services revenue fell 1.0% qoq, mainly due to weakness across Telecommunications, Media, Publishing and Entertainment (-8.4%), Tech and Services (-3.7%), Life Sciences and Healthcare (-2.4%), and Manufacturing (-0.5%). The decline was partially offset by growth in Retail and CPG (+5.1%) and Financial Services (+2.2%), while growth in the Public Services vertical was flattish
Aspires to own the full AI stack via infra build out HCLT announced its entry into the AI data-center business with an initial investment of up to Rs35bn, targeting a phased build-out toward 50MW capacity. The offering will combine AI infra, compute, models, software, and managed services, with investments linked to client commitments and partner financing (via a mix of debt and equity). The management believes India's supply-constrained AI infra market, rising sovereign AI requirements, and growing enterprise preference for private AI stacks and SLMs have the potential to create a significant long-term opportunity.
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