Buy HCL Technologies Ltd for the Target Rs. 2,200 by Motilal Oswal Financial Services Ltd
Another solid quarter
Services guidance raised; margin recovery visibility improves as well
* HCL Technologies (HCLT) reported 3QFY26 revenue of USD3.8b, up 4.2% QoQ CC, above our estimate of 2.3% QoQ CC growth. EBIT margin came in at 18.6% vs. our estimate of 18.1%. New deal TCV stood at USD3.0b (up 43.5% YoY). For FY26, revenue growth guidance was changed to 4-4.5% YoY in CC (vs 3-5% earlier). Services revenue growth is expected to be between 4.75% and 5.25% (vs. 4–5% earlier). EBIT margin guidance was maintained at 17-18%. 3Q adj. PAT rose 13.3% QoQ and 4.5% YoY to INR48b (vs. our est. of INR48b).
* For 9MFY26, revenue/EBIT grew 10.8%/5.0%, while adj. PAT declined 1.6% YoY in INR terms. We expect revenue/EBIT/adj. PAT to grow 12.3%/7.4%/9.0% YoY in 4QFY26. HCLT remains the fastest-growing largecap company, and we like its all-weather portfolio, which continues to outperform in an uncertain demand environment. We reiterate our BUY rating on HCLT with a TP of INR2,200, implying a 32% potential upside
Our view: Growth momentum intact with ACVs improving
* Growth and guidance: 3Q services growth of ~5% YoY CC and an upgrade in FY26 services guidance to 4.75-5.25% CC place HCLT among the fastestgrowing large caps, implying ~1.7% QoQ (~5.5% YoY cc) organic growth in 4Q despite seasonality. We expect growth rates to accelerate to 6% YoY in IT services in FY27E.
* Demand: Client conversations on AI have shifted toward enterprise-wide adoption, but implementation is slow as clients address data, cloud, and process constraints. The near-term revenue opportunity is concentrated in this foundational work rather than AI deployment. Conventional discretionary spending remains subdued; however, spending continues in AI infrastructure, engineering, and foundational transformation programs, where HCLT has seen higher traction. Client budgets are still being finalized and hence we expect limited color on CY26 demand across most commentaries in 3Q.
Bookings: Net new bookings of USD3b rose 17% QoQ and 43.5% YoY. ACV was at a four-year high and supports near-term revenue visibility, though management continues to flag quarter-to-quarter lumpiness in deal closures. We expect short-cycle AI services deals to pick up in CY26 and expect ACVs to inch up over the next two quarters.
Margins: Restructuring and labor code impacts are expected to remain largely one-off events, allowing margins to trend toward ~18% over FY27- 28. 4Q margins, though, will be impacted by seasonal weakness from the decline in products, wage hikes, and ongoing restructuring and SG&A investments. Ongoing AI-led productivity gains and pricing pressure in application services remain key risks to margin expansion in the medium term.
Beat on revenue and margins, upgrades IT services guidance to 4.75-5.25% YoY cc (vs.4-5% earlier)
* Revenue rose 4.2% QoQ in CC, above our estimate of 2.3% growth. ? New deal TCV stood at USD3.0b (up 17% QoQ/43.5% YoY).
* IT business grew 1.5% QoQ CC, while ER&D/ P&P rose 3.1 %/28.1% QoQ cc.
* 3Q EBIT margin was 18.6%, above our estimate of 18.1%. It included an 81bp impact from restructuring costs and excluded the one-time impact of new labor codes of INR9,560m.
* For FY26, revenue growth guidance was changed to 4-4.5% YoY in CC. (vs 3-5% earlier). Services revenue growth is expected to be between 4.75% and 5.25% (vs. 4–5% earlier).EBIT margin guidance was maintained at 17.0-18.0%.
* 3Q adj. PAT rose 13.3% QoQ and 4.5% YoY to INR48b.
* LTM attrition declined 20bp QoQ to 12.4%. Net employee headcount declined 0.1% to 226,379 as of 3Q end. HCLT added 2,852 freshers in this quarter.
* LTM FCF to net income stood at 120%.
* Management declared an interim dividend of INR12/share for 3QFY26.
Key highlights from the management commentary
* While global macro uncertainty continues to weigh on overall IT spending, structural demand for technology-led business transformation remains intact.
* Traditional discretionary spending has slowed; however, new pockets of discretionary spend are emerging, particularly in AI infrastructure, data foundations, and agentic AI use cases.
* Management emphasized little value in waiting for a broad discretionary recovery, instead the focus is on identifying where spending is actively occurring and aligning offerings accordingly.
* AI conversations have meaningfully matured YoY from experimentation to enterprise-wide reimagination of business processes. Clients are increasingly prioritizing data lifecycle management and foundational “Day-minus-1” services ahead of scaled AI deployments.
* Enterprise-wide AI adoption remains early; acceleration is currently the strongest in AI readiness, infrastructure, and data engineering, rather than large-scale production deployments.
Valuation and view
* We expect HCLT to deliver a CAGR of 6.7%/8.9% in USD revenue/INR PAT over FY25-28. The company remains the fastest-growing large-cap IT services firm, and we like its all-weather portfolio. We have largely kept our estimates unchanged. Reiterate BUY with a TP of INR2,200 (based on 26x FY28E EPS)
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
