Buy HCL Technologies Ltd for the Target Rs 1,450 by Motilal Oswal Financial Services Ltd
AI momentum strengthens, but guidance remains cautious Organic growth guidance unchanged at the midpoint; large-deal ramp-up to support FY28E growth
* HCL Technologies (HCLT) reported 2QFY27 revenue of USD3.7b, rising 2.3% QoQ CC, below our estimate of 3% QoQ CC. EBIT margin came in at 18.2%, in line with our estimate of 18.1%. New deal TCV was USD3.3b (up 26.8% YoY) in 2QFY27. For FY27, revenue growth guidance was raised at the lower end to 2.5–4.0% YoY in CC (from 1.0-4.0%), driven by M&A; organic guidance remained unchanged. IT Services revenue growth guidance was revised to 3–4% YoY CC from 1.5–4.5%, reflecting a cut of 50bp at the upper end. EBIT margin guidance of 17.5–18.5% is in line with our estimates.
* For 1HFY27, revenue/EBIT/adj. PAT grew 12.7%/17.2%/20.8% YoY in INR terms. We expect revenue/EBIT/PAT to grow 9.1%/9.4%/11.2% YoY in 2HFY27. Free cash flow stood at 87% of net profit for 2QFY27. We reiterate our BUY rating with an unchanged TP of INR1,450, based on 18x FY28E EPS. We maintain HCLT as our preferred pick in the large cap space.
Our view: Pipeline and bookings support near-term growth outlook, although macro uncertainty remains
* FY27 organic growth guidance remains broadly unchanged at the midpoint, although the upper end has been lowered by 50bp. While we believe the market was not factoring in growth at the upper end, the reduction is a slight dampener. Services growth is expected to be better than the midpoint. The USD1.14b Mercedes-Benz deal is expected to start contributing in 1QFY28. We estimate ~1.3% contribution to growth and build in 5.1% YoY CC growth for FY28 versus 3.3% for FY27, with large-deal ramp-ups supporting growth into FY28.
* Advanced AI revenue grew 28.4% QoQ CC and 78% YoY CC to USD219m, equivalent to ~5.9% of quarterly revenue, with an annualized run rate of USD876m. Higher-margin AI services contributed 32bp to sequential EBIT margin expansion, while management indicated that Advanced AI services margins are expected to be 7–10pp above traditional services. Non-AI revenue remained subdued, declining 1% YoY.
* The Anthropic partnership expands HCLT’s enterprise AI ecosystem and monetization opportunities. The global premier partnership with Anthropic complements the existing Open AI relationship and is expected to support enterprise adoption of agentic AI, with a focus on safety, cybersecurity, and governance. Management indicated that implementation revenue will largely follow a services model, while integration of AI Force and other software products could support a more non-linear model, including token-related pricing.
* 1HFY27 bookings were the strongest ever for a first half, with 2Q bookings of USD3.3b, rising 27% YoY. Demand remained healthy toward the end of the quarter, although discretionary spending and the broader operating environment remain fluid. We expect large-deal ramp-ups and AI-led engagements to support sequential growth over the next 3–4 quarters.
* EBIT margin expanded 131bp QoQ to 18.2%, aided by operating efficiencies, operating leverage, and the contribution from Advanced AI. Management indicated that the desired margin band remains 18–19% but has not committed to a higher range, given the need to reinvest in capabilities and AI talent. We expect EBIT margin to reach 18% in FY28, with further expansion dependent on the balance between AI-led productivity gains and reinvestment.
Valuation and view
* We expect HCLT to deliver a USD revenue CAGR of ~4% and INR PAT CAGR of ~12% over FY26–28, with EBIT margin reaching ~18%. While FY27E growth remains constrained by client-specific challenges in the telecom and manufacturing vertical, strong bookings, accelerating Advanced AI revenue, and the ramp-up of large deals provide support for a stronger growth trajectory in FY28E. AI-led productivity gains and a higher-margin revenue mix should also support profitability.
* We continue to like HCLT's all-weather portfolio. Its investments in Sarvam and the AI data center business strengthen its long-term AI positioning. We have increased our EPS estimates for FY28E by 1.9% and reiterate our BUY rating with an unchanged TP of INR1,450 based on 18x FY28E EPS. We maintain HCLT as our preferred pick in the large-cap space.
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