HCLTech Q4 deal wins boost outlook, analysts see limited stock upside

HCLTech (HCLT) reported a strong performance across its services and software businesses for the January-March quarter of the financial year 2024-25 (Q4FY25) despite global uncertainty and reduced discretionary spending. In constant currency, services grew by 0.7 per cent quarter-on-quarter (Q-o-Q), while the software business grew by 4.9 per cent year-on-year (Y-o-Y) in Q4.

 

HCLT is guiding for revenue growth in the range of 2-5 per cent for FY26, on consolidated basis and also its services. The management expects 1 per cent contribution to revenue from the Hewlett Packard Enterprise (HPE) acquisition, implying organic revenue growth of 1-4 per cent. For FY26, the earnings before interest and tax (EBIT) margin guidance is 18-19 per cent.

 

AI and Gen AI are now integral to most of these deals and HCLT saw strong deal bookings in Q4FY25. The net-new total contract value (TCV) is $2.9billion, an increase of 30 per cent Y-o-Y.

 

The constant currency growth guidance of 2-5 per cent seems optimistic due to poor macro. But the deals give some visibility. The management indicated that the upper-end of 5 per cent of guidance assumes status quo on demand. In effect, this growth would be achieved only if the deal pipeline continues to deliver and there is fast ramp up on new deals.

 

HCLT reported Q4FY25 revenue of $3,498 million, down 0.8 per cent Q-o-Q in constant currency. ITBS (business services) declined 0.3 per cent Q-o-Q, while ERD services grew 5.5 per cent, aided by the completion of the Communications Technology Group acquisition (640 bps Q-o-Q) of HPE in December ’24.

 

Overall, EBIT margin declined 160 bps Q-o-Q to 17.9 per cent (up 30 bps Y-o-Y), due to seasonal weakness in products (120 bps impact), wage revision (45 bps) and investment in sales and marketing (35 bps), while rupee depreciation added 40 bps. Net profit of ₹4,310 crore was down 6.2 per cent Q-o-Q and up 8.1 per cent Y-o-Y.

 

HCLT reported a robust 4.5 per cent Q-o-Q revenue growth (in $ terms) in financial services and telecom verticals. It may be due to improved spending by US clients and increase in small and mid-sized deals in Europe. However, retail saw revenue decline by 8 per cent Q-o-Q, while healthcare and life sciences declined 4.6 per cent Q-o-Q. 

 

HCLT has delivered many mega deal ramp-ups, participation in cloud and digital deals and used challenger status aggressively over the past three years. The GenAI story is powerful for the company.

 

The deal TCV includes a mega deal in ERD services though management did not disclose size, or other details. On a trailing 12-month basis, net new deal wins at $9.3 billion were down 4.9 per cent Y-o-Y.

 

First quarter is typically weak for HCLT due to the anniversary impact of multiple large deals. If this plays out as expected, there could be a small 0.75 per cent Q-o-Q revenue decline in Q1FY26.

 

The financial services vertical contributes 21.1 per cent of services segment revenues, which is lower than 28-34 per cent for other top Indian IT companies. HCLT has limited exposure to big US banking clients. It also has higher exposure to retail, CPG and manufacturing who are most vulnerable to tariffs. HCLT’s exposure to auto and aero industries and to US retail clients may impact growth. 

 

HCLT’s asset-heavy ERD portfolio also faces macro headwinds. On an organic constant currency basis, ERD segment has reported revenue declines since Q1FY24. The mega deal may reverse that, though there’s no clarity on the ramp- up timeline.

 

The Q4 results were announced on Tuesday post market hours. The stock surged 7.74 per cent to close at ₹1,594.30 on the BSE on Wednesday. Investors should be conservative due to risks of a deteriorating macro, challenges in verticals like retail and manufacturing and slowdown in discretionary projects.

 

According to Bloomberg, 20 of 37 analysts polled post Q4 are bullish, while six are bearish and remaining 11 are neutral. Their average one-year target price of ₹1,632.38 suggests limited upside from current levels.