Cautious outlook for HCLTech despite strong deal pipeline, execution

Robust bookings, steady execution contrast with conservative revenue guidance

Information technology (IT) major HCLTech reported a 0.5 per cent sequential decline in revenue for the April-June quarter (Q1) of 2026-27 (FY27) on a constant currency basis. This was, however, better than brokerage estimates, which had expected the decline to exceed 1 per cent. Earnings before interest and tax (Ebit) were in line with estimates.

 

What stood out in the quarter was the deal momentum, with net new total contract value (TCV) bookings of $2.4 billion, excluding the recent mega deal worth $1.14 billion. This marked the company’s highest-ever Q1 bookings and exceeded the four-quarter average of $2.2 billion.

 

While the company delivered an all-round beat in Q1FY27 and maintained its conservative FY27 revenue growth guidance of 1-4 per cent year-on-year in constant currency terms, client-specific challenges, increased competitive intensity, especially in large deals, and artificial intelligence (AI)-driven pricing deflation could weigh on performance. These concerns, coupled with a weak market (the Nifty 50 was down 0.6 per cent), saw the stock slip 4.5 per cent in Tuesday’s trade.

 

While the IT services business was flat sequentially, a 3.7 per cent decline in the engineering research and development (ER&D) segment weighed on Q1 revenue. This was due to ongoing discretionary spending cuts at two large US telecommunications (telecom) clients, a trend the company had highlighted in the previous quarter. Partly offsetting the impact was a strong performance in the products business, which grew 2.2 per cent sequentially. The company highlighted continued momentum in AI-led transformation programmes, data and analytics, and large-deal execution. 

 

Among verticals, banking, financial services and insurance stood out, supported by AI-led wallet share gains and healthy demand for data and analytics, while the technology and telecom segments remained under pressure from discretionary spending cuts. Life sciences and healthcare faced headwinds due to the rollover of earlier regulatory programmes and a muted US healthcare market.

 

Aided by lower restructuring costs and foreign exchange gains, Ebit margins improved sequentially, although part of the improvement was offset by seasonal productivity factors and weaker ER&D revenue. The company retained its FY27 Ebit margin guidance of 17.5-18.5 per cent, including restructuring costs.

 

Motilal Oswal Research expects margins to remain largely rangebound through FY27 and 2027-28 (FY28), as AI investments offset operating leverage. Client-specific issues in key verticals such as telecom have reduced HCLTech’s growth premium in FY27. That said, a potentially strong exit and continued robust deal wins could restore the gap in FY28, said analysts Abhishek Pathak and Keval Bhagat of the brokerage. It has a ‘buy’ rating with a target price of ₹1,450.

 

The company reaffirmed its FY27 revenue growth guidance of 1-4 per cent and 1.5-4.5 per cent for the services business on a constant currency basis. Growth is expected to be supported by a strong deal pipeline across business verticals, continued AI implementation, and strategic partnerships. IT services execution remained strong, backed by record bookings and accelerating AI demand. However, analysts at Antique Research, led by Vikas Ahuja, said the unchanged guidance suggests management remains cautious about the pace of a broad-based demand recovery despite its confidence in execution and the deal pipeline. The brokerage has a ‘hold’ rating with a target price of ₹1,225.

 

Kotak Research believes HCLTech can grow in line with, or marginally ahead of, the sector in FY27 and FY28. This would be driven by healthy TCV, the recent mega deal win, robust growth in advanced AI revenue, and an increase in the number of $20 million accounts.

 

A portfolio with relatively lower exposure to discretionary spending and AI-disrupted services provides some support. Investments in Sarvam and a planned gradual foray into the data centre business to offer full-stack AI services indicate a measured approach and a hedge against AI-related risks, it added. The brokerage has a ‘reduce’ rating, saying the stock already prices in the expected gains.