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Strong execution, but outlook maintained

HCLT reported Q2FY27 rev. growth of 2.3% QoQ CC, marginally below our and consensus est. of 2.4% and 2.7%, respectively. Services segment grew 3.0% QoQ CC (organic 2.3% QoQ), led by ITBS (+2.7%) and ER&D (+4.1%), while Software declined 5.8% QoQ CC. Adj. EBIT margin expanded 150 bps QoQ to 19.0%, vs our estimate of 17.7%, aided by higher margin AI-led revenues and outperformance of ITBS. Advanced AI revenue grew 28.4% QoQ CC to USD219mn (annualized run rate of USD 876mn), derives 7–10% higher margins than traditional services. Management sees AI as an incremental growth lever to offset deflation in traditional services, the partnerships with frontier model providers help capture enterprise AI spending. Software segment continues to weigh on consol business due to underlying transition of perpetual licence model to subscription-led revenue. Deal momentum remained strong, with net new bookings of USD 3.26bn marking the 2nd highest quarterly bookings in the company's history. Despite the healthy bookings and pipeline, management remains cautious on the outlook and has largely maintained the organic growth guidance around the midpoint of the guidance band. Considering the outperformance of Service business (ITBS), we raise our Service business growth to 3.8% (3.2% earlier), while retaining FY28E and FY29E est. On the margins front, the outperformance in Q2 was notable and hence we pass on the benefits and raise our FY27 margins to 18.2% (17.8% earlier), while keeping FY28E and FY29 margins est. largely unchanged. We value the stock at 15x Sep. 28E EPS to arrive at a target price of INR 1,230 and maintain our HOLD rating.

Revenue: HCLT reported revenue of US$3.72 bn, up 2.3% QoQ CC with Services growing by 3% QoQ CC while Software declined by 5.8% QoQ CC. Segment wise TMPE, Retail & FS grew by 10.0%, 4.7%, & 4.1% QoQ respectively while Public services declined by 2.8% QoQ. For FY27, HCLT narrowed cons. Rev. growth guidance from 1%-4% to 2.5%-4% and Services rev. growth guidance from 1.5%-4.5% to 3%-4%. Advanced AI revenue for company came at US$ 219 mn, up 28.4% QoQ CC.

Operating Margin:

EBIT margin (excluding restructuring expense of 0.84%) came at 19.0%, up 150 bps QoQ aided by the tailwinds of Project Ascent (+73 bps), higher margin of advanced AI offerings (+32 bps), operating leverage due to growth (+50 bps) and rupee depreciation (+23 bps), partially offset by impact of HP Telco Solutions acquisition of 25 bps. HCLT maintained EBIT margin guidance of 17.5%-18.5% for FY27.

Deal Wins: Deal wins in Q2 were HCL’s second highest ever for a quarter, with TCV of US$ 3.26 bn compared to 2.41 bn in Q1. Management indicated that AI was a central theme in every large deal won, and deal wins were broad based across all verticals.

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