Sell HCL Technologies Ltd for Target Rs1,500 by Elara Capitals
Run-up in stock limits upside
HCL Technologies (HCLT IN) reported better-than-expected Q3 on revenue and margin fronts. The beat was led by better-than-expected performance in its product business (Q3 is seasonally strong). However, some part of the uptick in the products business was likely from one-time tactical license revenues, which may not sustain, going forward. Strong Q3 led to HCLT increasing its revenue growth guidance for FY26 from 3% to 4% at the lower end, but guidance at the upper end has been trimmed by 50bps to 4.5% from 5% earlier, indicating a 1.2-3% sequential drop in Q4. The EBIT margin guidance has been maintained at 17-18%. HCLT indicated that demand environment has not changed much, but some pockets (BFSI) are seeing improvement. We raise our TP to INR 1,500 on 21x (unchanged) FY27E P/E. However, we revise HCLT to SELL from Reduce given that run-up in the stock price limits upside
Strong deal momentum: HCLT reported revenue growth of 4.2% QoQ in CC terms while revenue was up 4.8% YoY CC at the company level. IT services (72.3% of the mix) reported 1.5% QoQ and 3.8% YoY growth in CC. ER&D posted a 3.1% QoQ CC rise, and Product (P&P) was up 28.1% QoQ in CC terms. Vertical-wise, YoY in CC, BFSI, Tech, Public services and Telecom reported growth in the range of 7.1-14.4%, Manufacturing was up +1.8% YoY CC, while Lifesciences and Retail CPG reported a decline. Broad-based growth was seen across geographies YoY in CC, with Europe market up 4.6%, and the US market growing 1.5%. HCLT recorded a new deal TCV of ~USD 3bn in Q3FY26, up 17% QoQ and 43.5% YoY. Advanced AI posted revenues of USD 146mn in Q3FY26 (3.8% of revenue), up 19.9% QoQ CC. Interim dividend of INR 12/share was announced in Q3, with a payout ratio of 80%.
Margin expansion led by seasonality in P&P: Q3 operating margin, excluding the one-time impact of the new labor code, was 18.6%, up 111bps QoQ. Excluding restructuring costs, margin was 19.4%. Product business helped margin expansion by 118bps while Services margin declined 7bps QoQ (primarily due to wage hikes (80bps), furlough seasonality (45bps) and Restructuring costs, which hit margins by 26bps in Q3 but partially offset by utilization gains (104bps) and currency benefit (40bps). HCLT reiterated its full-year EBIT margin guidance of 17–18%, which factors in restructuring costs but excludes the impact of labor code.
Revise to SELL; TP raised to INR 1,500: Q3 revenue and margin were in line with typical seasonal patterns in the products business, which lifted performance. However, despite strong Q3, HCLT cut the upper end of its guidance by 50bps, indicating weak Q4. Also, uptick in Q3 for the product business was led by tactical license revenues rather than sticky subscription revenues, which may not be sustainable in our view. Margin pressure may continue due to new AI skills coming at higher costs. So, we reduce our FY27E/FY28E margin estimates by 10bps / 80bps, respectively.
We increased our TP to INR 1,500 (on unchanged 21x FY27E EPS) from INR 1,445 to factor in strong Q3. We revise HCLT to Sell (from Reduce) as the stock has run up ~20% in past 3-4 months and valuations appear full. The stock is trading at 12-13% premium in FY27E to Infosys despite similar earnings growth of 5-6% over FY25-27E, which appears unreasonable in our view
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SEBI Registration number is INH000000933
