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Subdued Performance; Focus on Digital Transformation

Est. Vs. Actual for Q1FY26: Revenue – INLINE ; EBIT Margin – MISS ; PAT – MISS

Recommendation Rationale

• Weak performance across key verticals: Management sees some stress in manufacturing (especially automotive), life sciences, retail, and CPG segments, contributing to utilisation challenges and necessitating restructuring.

• Deal wins/pipeline: Two large deals anticipated for Q1 were delayed to Q2 due to procedural reasons. The pipeline remains strong, driven by digital business, engineeringled approach, and AI propositions, with healthy demand for efficiency-led deals.

• AI investments: Investments in GenAI and Go-to-market (GTM) teams are expected to normalise in FY27 as growth momentum takes place.

Sector Outlook: Cautiously optimistic

Company Outlook & Guidance: HCL Technologies focuses on scaling up the GenAI through partnerships, resulting in digital transformation across clients' applications and data platforms. The management has guided a revenue growth of 3.0% - 5.0% YoY in CC (earlier 2-5% YoY) with an EBIT margin of 17-18% for FY26.

Current Valuation: 25x FY27E P/E

Current TP: 1,750/share

Recommendation: With a strong deal pipeline across business verticals, AI implementation for better performance and improved revenue guidance. We believe HCL will start commencing a better recovery from H2FY26. Hence, we resume our coverage with a HOLD rating on the stock.

Financial performance

In Q1FY26, HCL Technologies reported revenue of Rs 30,349 Cr vs Rs 28,057 Cr, up 8.2% YoY and 0.3% QoQ. EBIT stood at Rs 4,942 Cr vs Rs 4,795 Cr, up 3.1% YoY but down 9.2% QoQ, led by lower utilisation and additional Gen AI and GTM investments. Thus, EBIT margin stood at 16.3%. Net Income stood at Rs 3,844 Cr vs Rs 4,259 Cr, down 9.7% YoY and 10.8% QoQ, driven by lower other income and higher interest cost. However, in CC terms, revenue was down 0.8% QoQ and up 3.7% YoY, primarily due to robust performance in the services business. LTM attrition levels were at 12.8% vs 12.8% YoY (unchanged). The board recommended an interim dividend of Rs 12/share.

Valuation & Recommendation

The management remains optimistic about the improvement and scalability of business operations. Moreover, overall deal pipelines remain strong, with a focus on digital business and engineering services. We are constructive on the long-term outlook of the company and expect a quicker recovery from H2FY26 onwards. Therefore, we resume over coverage with a HOLD rating on the stock and assign a 25x P/E multiple to its FY27E earnings to arrive at a TP of Rs 1,750/share, implying an upside of 8% from the CMP.

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SEBI Registration number is INZ000161633