Buy HCL Technologies Ltd For Target Rs. 1,800 by Motilal Oswal Financial Services Ltd
Measured optimism, backed by deal wins
Gives robust FY26 guidance amid an uncertain backdrop
* HCL Technologies (HCLT) reported 4QFY25 revenue of USD3.4b, down 0.8% QoQ and 2.9% YoY in constant currency (CC) vs. our estimate of 0.6% QoQ decline. EBIT margins came in at 18% vs. our estimate of 17.6%. New deal TCV stood at USD3b (up 43% QoQ) in 4QFY25. For FY26, HCLT provided revenue growth guidance of 2-5% YoY in CC (similar for Services). This exceeds expectations and implies a 1.3% CQGR over the next four quarters at the upper end. For FY25, revenue/EBIT/PAT grew 6.5%/7.0%/10.8% YoY in INR terms. We expect revenue/EBIT/PAT to grow by 8.2%/10.6%/1.4% YoY in 1QFY26. We reiterate our BUY rating on HCLT with a TP of INR1,800, implying a 22% potential upside.
Our view: Deal ramp-ups and wins provide leverage right from 1Q
* FY26 guidance encouraging, pegs HCLT at the top of the growth pyramid again: The lower end of the guidance (1.2% organic growth) assumes a deterioration in the demand environment, whereas the upper end of the guidance assumes a couple of large deal closures in the pipeline (which should close in 1Q as per management).
* We believe this guidance is encouraging. While putting the fears of a washout FY26 to rest, it implies HCLT would outperform both TCS and Infosys at the upper of its guidance range.
* Deal TCV remained robust, with net bookings reaching the second-highest level in the past 16 quarters—surpassed only by the mega deal-led TCV in 2QFY24. The pipeline continues to hover near all-time highs, with GenAI and AI capabilities embedded in every engagement. Management commentary on deal wins was uniformly positive.
* 4Q deal bookings portend strong 1Q: Deal bookings were strong in 4Q as well at USD3b (up 43% QoQ/31% YoY), and we believe these ramp-ups imply a faster 1Q than usual for HCLT.
* Cost takeout, but AI at the forefront: HCLT's commentary resonated with our views in the report dated 4th Apr’25 (Liberation Day and Indian IT: Breaking point or turning point?). We believe enterprises could fast-track GenAI scale up as cost pressures escalate. It is still too early to say whether spends around GenAI would accelerate, but it is logical to assume that AI-led efficiencies will be a major driver of cost-takeout deals, compared to earlier cycles when plain vanilla re-badging was the norm.
Revenue and margins in line, FY26 growth guidance of 2-5% beats expectations
* Revenue was down 0.8% QoQ in CC (organic decline of 1.7% QoQ cc) vs. our estimate of 0.6% decline. For full year, the company reported USD13.8b in revenue, up 4.7% YoY CC, within the guidance of 4.5%-5% YoY CC.
* New deal TCV stood at USD3b (up 43%/31% QoQ/YoY) in 4QFY25. For FY25, deal TCV was USD9.2b vs. USD9.7b in FY24.
* IT business/P&P declined by 0.3%/12.9% QoQ CC, while ER&D reported 5.5% QoQ cc growth.
* For 4QFY25, EBIT margin was 18% vs. our estimate of 17.6%. For full year, EBIT margin stood at 18.3% (within guidance of 18-19%).
* For FY26, revenue growth guidance is 2-5% YoY in CC (similar for Services). This exceeds expectations and implies a 1.3% CQGR over the next four quarters at the upper end. We estimate an 80bp contribution from the HP CTG deal. Even on an organic basis, the 1.2-4.2% CC growth guidance is ahead of Infosys’ 0-3% guidance.
* EBIT margin guidance is maintained at 18.0-19.0% in FY26.
* In 4QFY25, PAT was up 6.2% at INR43b (up 8.1% YoY) vs. our est. of INR43b.
* LTM attrition was down 20bp QoQ to 13%. Net employee headcount increased 1.2% QoQ in 4QFY25 and stood at 223,420 as at end of FY25 vs. 227,481 as of FY24. HCLT added 1,805 freshers in this quarter.
* LTM FCF to net income conversion stood at 123%. Management declared an interim dividend of INR18/share.
Key highlights from the management commentary
* Discretionary spending will remain subdued. Tariffs and de-globalization are expected to impact the IT sector, leading to potential budget cuts and deal renegotiations.
* Clients are looking to diversify supply chains. The tariff impact will hit the Manufacturing and Consumer segments first, and eventually become broadbased (with a possible one-quarter lag).
* AI-driven efficiency will drive vendor consolidation. While it may lead to some deflation, HCLT is securing a higher wallet share during renewals — 95% of renewals included incremental business.
* 4Q revenue decline was primarily due to seasonality in the P&P (Products & Platforms) segment.
* TCV in 4QFY25 stood at USD3b, aided by a megadeal; bookings were wellbalanced across service lines. About 50% of 4Q bookings came in Mar’25.
* FY26 revenue growth guidance: 2-5% YoY CC (same for Services), with 1% contribution from inorganic growth. Guidance is supported by strong 4Q bookings.
* GCC deals are signed at company-level profitability. In-sourcing is not expected in these deals for 3-5 years.
* FY26 EBIT margin guidance is maintained at 18-19%. ? Focused on building non-linearity in revenues — aiming for higher productivity and growth with a leaner workforce. Delivery model will be location-agnostic.
* ER&D bookings grew 75% YoY in FY25; upbeat outlook for FY26.
Valuation and view
* We expect HCLT to deliver 18.5% EBIT margin in FY26, which should recover in FY27 as growth improves. We expect HCLT to deliver a CAGR of 5.9%/8.2% in USD revenue/INR PAT over FY25-27E. We keep our estimates largely unchanged. Reiterate BUY with a TP of INR1,800 (based on 24x FY27E EPS).
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