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2025-07-15 04:18:39 pm | Source: Motilal Oswal Financial Services Ltd
Buy HCL Technologies Ltd for the Target Rs.2,000 by Motilal Oswal Financial Services Ltd
Buy HCL Technologies Ltd for the Target Rs.2,000 by Motilal Oswal Financial Services Ltd

Continues to impress despite margin hiccup

Tightens guidance as growth visibility improves

* HCL Technologies (HCLT) reported 1QFY26 revenue of USD3.5b, down 0.8% QoQ CC vs. our estimate of 1.2% QoQ CC decline. EBIT margins came in at 16.3% vs. our estimate of 17.5%. New deal TCV stood at USD1.8b (down 8% YoY) in 1QFY26. For FY26, revenue growth guidance was increased to 3%-5% YoY CC (from 2%-5% earlier), implying a CQGR range of 1.4%-2.7% for the next three quarters. EBIT margin guidance was lowered to 17%-18% for FY26 (from 18%-19% earlier).

* For 1QFY26, revenue/EBIT grew 8.2%/3.0% and PAT declined 10% YoY in INR terms. We expect revenue/EBIT/PAT to grow by 9.4%/2.1%/5.3% YoY in 2QFY26. HCLT remains the fastest-growing large-cap IT services company, and we like its all-weather portfolio. We reiterate our BUY rating on HCLT with a TP of INR2,000, implying a 23% potential upside.

 

Our view: HCLT holds growth fort

* Revenue beat estimates, and HCLT upgraded the bottom end of its revenue guidance. The guidance implies total revenue CQGR of 2.7% at the top end of the guidance range, whereas, for services, it implies a CQGR of 2.0%. HCLT is on track to be the fastest-growing company among the top 4 names.

* Margins missed estimates, however, impacted by higher GenAI and SG&A investments (30bps), but primarily due to lower utilization (80bps), as employees released from select projects (on productivity gains) couldn’t be re-deployed in time. We expect both these factors to spill over to 2Q, but expect margins to normalize post that.

* TCV optically appears tepid, but pipeline remains healthy: New deal TCV stood at USD1.8b, down 8% YoY. However, this is not reflective of demand weakness – two large deals initially expected in 1Q were deferred to 2Q (unrelated to macro concerns) and a sizeable vendor consolidation deal in financial services (not included in 1Q) will start contributing to revenue from 2QFY26 onward.

* Discretionary demand in financial services and hi-tech improves: HCLT called out a recovery in discretionary spends in financial services and hitech, while weakness continued in manufacturing, life sciences, and retail.

* We cut FY26 estimates by 3-4% to account for higher investments, whereas we keep FY27 estimates largely unchanged. We believe FY27 margins can again get back to normalized levels of 18-18.5%.

 

Beat on revenue and miss on margins; upgrades lower end of guidance

* Revenue was down 0.8% QoQ in CC vs. our estimate of 1.2% decline.

* New deal TCV stood at USD1.8b (down 40% QoQ/8% YoY).

* IT business was flat QoQ CC, while ER&D/P&P were down 0.5%/7.1% QoQ cc.

* EBIT margin was 16.3% – below our estimate of 17.5%.

* For FY26, revenue growth guidance was increased to 3%-5% YoY CC from 2%-5% earlier. EBIT margin guidance was lowered to 17%-18% for FY26 (from 18%-19% earlier).

* In 1QFY26, PAT was down 10.8% QoQ/9.7% YoY at INR38b vs. our est. of INR43b.

* LTM attrition was down 20bp QoQ at 12.8%. Net employee headcount increase was flat in 1QFY26. Net employee headcount stood at 223,151 as of 1QFY26 end. HCLT added 1,984 freshers in this quarter.

* LTM FCF to net income stood at 121%.

* Management declared an interim dividend of INR12/share for 1QFY26.

 

Key highlights from the management commentary

* The environment remained stable with some variations across verticals. It did not deteriorate as feared.

* Discretionary spending trends vary by vertical.

* Discretionary spending in Financial Services and Technology has not worsened as earlier anticipated.

* Revenue declined by 0.8% QoQ in CC. Growth was seen in the Tech Services vertical, especially around conversational AI and contact center management, which ramped up in Mar’25 and revenue realized in 1Q.

* Two large deals expected to close in 1Q have moved to 2Q. The delays are unrelated to macro factors, and management remains optimistic about conversions.

* Revenue growth guidance for FY26 was raised to 3-5% YoY in CC (from 2–5%) due to better-than-expected 1Q performance and an improved outlook.

* EBIT margin guidance was reduced to 17-18% (from 18–19%) due to lower utilization and restructuring efforts. One-time restructuring costs are factored into the guidance.

* GenAI and GTM investments are expected to normalize as growth improves by FY27.

* Agentic AI gaining traction in operational efficiency and application modernization.

 

Valuation and view

* We expect HCLT to deliver a CAGR of 7.0%/8.8% in USD revenue/INR PAT over FY25-27E. HCLT remains the fastest-growing large-cap IT services company, and we like its all-weather portfolio. We reduce our FY26 estimates by 3-4% to account for higher investments, whereas we keep FY27 estimates largely unchanged. Reiterate BUY with a TP of INR2,000 (based on 26x FY27E EPS).

 

 

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