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HCLTech, India’s third-largest IT services company, showcased robust Q2 performance with significant revenue growth, healthy deal wins, and strong margin expansion driven by its burgeoning AI business, though some analysts remain wary of its premium valuation.
Illustration: Dado Ruvic/Reuters
Key Points
- HCLTech reported a robust 2.3 per cent quarter-on-quarter revenue growth in constant currency, reaching $3.7 billion, primarily driven by its services and engineering research and development (ER&D) segments.
- The company secured $3.3 billion in net new bookings for the quarter, marking its second-highest quarterly figure and strongest first half to date, indicating a healthy deal pipeline.
- HCLTech’s Ebit margin rose to 18.1 per cent, exceeding estimates, with AI efficiencies and higher-margin advanced AI revenues contributing significantly to the improvement.
- Management raised its FY27 revenue growth guidance to 2.5-4 per cent and services revenue growth guidance to 3-4.5 per cent in constant currency terms.
- Despite strong performance, some brokerages like HSBC, JP Morgan, and Citi Research maintain cautious ratings due to HCLTech’s premium valuation compared to its peers.
Robust services revenue growth, better-than-expected margin performance, and steady guidance helped shares of HCLTech, the country’s third-largest information technology services company by market capitalisation, gain 8.28 per cent on Tuesday.
Healthy new deal wins and traction in its artificial intelligence (AI) business also lifted investor sentiment.
The stock was the top gainer in both the Nifty 50 and the Sensex, closing at Rs 1,321.
Strong Revenue Growth and Deal Wins
Driven by the services and engineering research and development (ER&D) segments, the company reported quarter-on-quarter (Q-o-Q) revenue growth of 2.3 per cent in constant currency terms to $3.7 billion.
The services business, which accounts for three-fourths of revenue, grew 3 per cent sequentially, including inorganic contributions from HPE’s telecommunications (telecom) solutions business and Jaspersoft.
While inorganic growth contributed 97 basis points (bps) to overall revenue growth, the growth rate excluding acquisitions was 2.3 per cent.
The ER&D business grew a robust 4.1 per cent, supporting overall growth.
The product business, however, weighed on the top line, with revenue declining 5.8 per cent.
Management raised its revenue growth guidance for 2026-27 (FY27) to 2.5-4 per cent from 1-4 per cent and its services revenue growth guidance to 3-4.5 per cent from 1.5-4.5 per cent, both in constant currency terms.
The organic growth midpoint remains broadly unchanged, with the 50 bps increase in the overall guidance driven by inorganic contributions.
According to HDFC Securities, the guidance implies no acceleration in the second half of FY27, as management refrained from extrapolating a few weeks of strong demand amid a fluid business environment.
Even as the macroeconomic (macro) environment remained uncertain, the deal pipeline remained healthy, with the company reporting net new bookings of $3.3 billion for the quarter.
This was 35 per cent higher sequentially and 27 per cent higher year-on-year, marking the second-highest quarterly bookings figure and the company’s strongest first half to date.
The $1.14 billion mega deal, won in July, is expected to start contributing in the first quarter of 2027-28 (FY28), rather than the third (October-December/Q3) or fourth quarter (January-March/Q4) of FY27, which provides revenue visibility.
The company indicated that demand remained healthy, with a broad-based pipeline across verticals and geographies, although management remained cautious amid volatile external conditions.
AI Implementation and Strategic Partnerships
According to Axis Securities analysts Kuber Chauhan and Abhishek Bhalotia, the outlook is supported by a healthy deal pipeline across business verticals, continued AI implementation, and strategic partnerships.
The brokerage believes HCLTech is well positioned for a stronger recovery following its restructuring initiatives and as AI adoption broadens across business verticals, provided the macro environment remains stable.
It has a “buy” rating on the stock, with a target price of Rs 1,360.
Exceeding Margin Estimates
Alongside healthy deal bookings, margin performance also exceeded estimates.
The earnings before interest and tax (Ebit) margin rose to 18.1 per cent, up 130 bps Q-o-Q and 70 bps from a year earlier.
The improvement was well above estimates and was driven by gains of 73 bps from AI efficiencies and Project Ascend, 50 bps from operating leverage, 32 bps from higher-margin advanced AI revenues, and 23 bps from foreign exchange gains.
These gains were partly offset by headwinds of 25 bps from the HPE telecom acquisition and 22 bps from restructuring costs.
The company said AI services revenues carry margins 7-10 per cent higher than its overall company average.
It retained its FY27 Ebit margin guidance of 17.5-18.5 per cent, which includes 40-50 bps in restructuring costs.
Nomura Research has raised its FY27 Ebit margin estimate by 50 bps to 18 per cent.
It has also increased its FY27-28 earnings per share estimates by 2-3 per cent to factor in the Q2 results and raised its target price to Rs 1,330.
Brokerage Caution on Valuations
Despite these positives, some brokerages remain cautious on the stock given its premium valuation. HSBC Research has a ‘hold’ rating, arguing that HCLTech trades at a premium to peers despite moderate outperformance and lower margins.
JP Morgan Research is underweight on the stock, believing that slower organic growth at the midpoint of the guidance range calls into question HCLTech’s premium multiples.
Citi Research says the sustainability of margins will be key and has a ‘sell’ rating, observing that the stock trades at a 20-25 per cent premium to Tata Consultancy Services and Infosys.
