Add HCL Tech Ltd for the Target Rs 1,250 by Emkay Global Financial Services Ltd
HCL Tech (HCLT)’s 2Q operating performance was a mixed bag. Revenue grew 2.3% qoq CC, ~80bps below our estimate mainly on weakness in software business. Services revenue grew 3% qoq in CC terms, adding ~$100mn (~$50mn from Advanced AI; rest from core business). EBITM rose by 130bps qoq to 18.2% vs Emkay estimate of 17.6%. Advanced AI revenue grew 28.4% qoq CC to $219mn (5.8% of revenue), contributing ~32bps to the margin uplift, given its higher margin profile vs traditional business. HCLT is offsetting AIdriven deflation by gaining market share in core services and scaling Advanced AI offerings, thus capitalizing on rising AI spends. Deal wins were robust, with new bookings at $3.3bn (up ~27% yoy). HCLT launched HCLTech Pulse, targeting fast-growing enterprises with annual revenue of $500mn-$5bn. For FY27, HCLT largely retains the midpoint of its organic revenue guidance, with overall CC revenue growth of 2.5-4.0% (implying 1.5-3.5% CQGR) and Services growth of 3.0-4.0% (0.1-1.4% CQGR), with 17.5-18.5% EBITM. Guidance includes inorganic contributions of 87bps to overall revenue and 62bps to Services. Mgmt confidence stems from strong bookings, a healthy pipeline, and sustained momentum in advanced AI revenue. We tweak our estimates by - 0.4% to 2.6%, factoring in the 2Q performance; retain ADD/TP of Rs1,250 at 16x Sep-28E EPS.
Results summary
Revenue grew 2.0% qoq (up 2.3% CC) to $3.72bn, below our estimate of 3.1% CC qoq. Services revenue grew 3.0% CC qoq, including inorganic contribution from HPE telco and Jaspersoft; inorganic growth contributed 97bps to overall revenue growth. Among segments, ITBS/ER&D grew 2.7%/4.1% CC qoq, while Software business declined 5.8%. EBITM rose by 130bps qoq to 18.2%, beating our expectation of 17.6% on benefits from AI-driven efficiencies under Project Ascend (+73bps), higher margin under Advanced AI mix (+32bps), operating leverage (+50bps), and forex (+23bps), offset by higher restructuring cost (-22bps) and integration of HPE telco (-25bps). Headcount grew 2.9% qoq to 230,339. HCLT announced Rs12/sh interim dividend. What we like: Strong deal intake, margin beat. What we do not like: weak cash conversion (~64% OCF/EBITDA).
Broad-based growth aids overall growth
Services revenue rose 2.7% qoq (USD terms), driven by growth in Telecommunications, Media, Publishing and Entertainment (10.1%), Retail and CPG (4.7%), Financial Services (4.1%), Tech and Services (2.0%), Life Sciences and Healthcare (1.2%), and Manufacturing (0.5%). This was partially offset by decline in Public Services (2.8%).
Executing on the five-pillar strategy
HCLT continues to execute on its five-pillar AI strategy:
1) AI-led service transformation is improving productivity and helping win larger deals.
2) AI Force has evolved into a differentiated IP platform with >900 agents.
3) AI services are scaling up fast, with Agentic AI crossing $100mn a quarter.
4) HCLT is deepening strategic partnerships, including OpenAI advanced partner status and a global premier partnership with Anthropic.
5) HCLT is building AI talent at scale through a dedicated FDE academy.
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