IGI Logo

Q1FY26 margins miss on delayed ramp-ups, client bankruptcy & investments

* Reported Revenue for Q1FY26 stood at USD 3,545Mn up 1.3% Q0Q (vs CEBPL est. at USD 3,545Mn). The CC de-growth was 0.8% QoQ, however the cross-currency tailwind of 2.1% mitigated the further top-line deceleration. In INR terms, revenue stood at INR 3.03Bn, up 0.3% QoQ.

* EBIT for Q1FY26 came at INR 49Bn, down 9.2% QoQ (vs CEBPL est. at INR 54Bn). EBIT margin was down 171bps QoQ to 16.3% (vs CEBPL est. at 17.8%).

* PAT for Q1FY26 came at INR 38Bn, down 10.8% QoQ (vs CEBPL est. at INR 43.7Bn).

FY26E revenue guidance revised up 3-5% CC, led by deal closures certainty HCLT reported USD 1.8Bn in net new TCV bookings for Q1FY26, excluding some large deals, which got delayed due to procedural issues. However, management remains confident about their closure in Q2FY26, expecting a step-up in TCV & a corresponding ramp-up in revenue thereby bringing in more certainty on demand versus as conveyed in Q4FY25. This reinforces the company’s stance on revising FY26 revenue guidance to 3–5% (from 2–5%) in CC terms, which would be driven by AI led demand across verticals and services. Growth opportunities remain strong in Digital and ER&D segments, particularly driven by AI & data capabilities, with ER&D expected to lead near to mid-term growth. While Financial Services & Technology show promise in discretionary spending, however verticals like Healthcare-Life Sciences, Manufacturing, & Retail are under pressure due to macroeconomic headwinds accelerated by change in US Tariff policy.

AI driven talent investments, lowers FY26 EBIT margin guidance to 17-18%: Q1FY26 EBIT margin stood at 16.3%, down 161bps QoQ. The decline was mainly due to lower utilization (80bps) caused by specialized hiring, skill/ location mismatches in redeployment, & ramp-downs in automotive sector. Other contributors included higher S&M spends for Gen AI (30bps), a one-off client bankruptcy (30bps), & reduced software revenue mix (20bps). As a result, HCLT revised down its FY26 EBIT margin guidance to 17–18% (from 18–19%), factoring in Q1FY26 margin impact, ongoing investments in AI, & restructuring costs. Management aspirational EBIT margins however still range between 19- 20%. Attrition rate dropped to 12.8% LTM, while headcount declined slightly by 269 to 223,151 as the company aims to drive non-linear growth. The company is now prioritizing specialized fresher hiring, offering up to 3–4x base pay. The newly hired 50 skilled fresher’s team will leverage HCL tech’s AI led LLM’s across verticals, winning more deals with better TCV conversions and growth rates going ahead.

View & Valuation: HCLT is strategically investing to align with evolving client demands, positioning itself for sustained relevance. The recent partnership with OpenAI is expected to boost its service capabilities and product scalability. In Q1, 8 of 9 contract renewals occurred at higher revenue run rates, reinforcing confidence in its execution, supported by increased discretionary spending in key verticals like Financial Services. As a result, we revise our revenue estimates upward by 1–2%, factoring in strong growth visibility and a conservative margin stance within the guided range. This supports a modest re-rating of the stock, raising the PE multiple to 22.5x (from 22x), and maintaining our ADD rating with a revised target price of INR 1,685, based on FY27E/FY28E average EPS of INR 74.9.

For Detailed Report With Disclaimer Visit. https://choicebroking.in/disclaimer

SEBI Registration no.: INZ 000160131