HCLTech sees rating downgrade post Q1 results, guidance disappointment

The April-June quarter (Q1FY26) results and guidance of HCL Technologies (HCLTech) have resulted in disappointment.

 

HCLTech reported a revenue decline of 0.8 per cent quarter-on-quarter (Q-o-Q) in constant currency (CC) terms.

 

But margins were lower than expectations, impacted by lower utilisation, GenAI investments, and client bankruptcy.

 

Guidance indicates that margins will remain subdued in Q2FY26, as some restructuring cost will spill over.

 

The FY26 earnings before interest and taxes (Ebit) margin guidance was lowered to 17-18 per cent (earlier 18-19 per cent). This was to account for margin pressure, upfront investments in GenAI, and planned restructuring expenses with an estimated impact of about 30-40 basis points (bps).

 

HCLTech expects utilisation to normalise by Q3FY26 and margins to improve in the second half of FY26. On the positive side, the lower band of revenue growth guidance was raised by 100 bps from 2-5 per cent to 3-5 per cent in CC terms. 

 

The implied revenue compound quarterly growth rate is in the range of 1.4-2.7 per cent for the lower and upper ends of revenue guidance for FY26, which is not so challenging, assuming deals ramp up from Q2.

 

New deal wins totalled $1.8 billion (lower than expectations) due to delayed signing and a large vendor consolidation deal slipping from Q1 to Q2.

 

The management said the demand environment remained challenging while there is healthy demand for efficiency-led deals. There is confidence about strong demand in financial services and tech.

 

HCLTech reported revenue of $3.545 billion, down 0.8 per cent Q-o-Q in CC terms. 

 

Ebit margin declined 160 bps sequentially to 16.3 per cent, owing to higher investments (attributed to fall of 30 bps), lower utilisation due to location mismatch challenges (minus 80 bps) from capacity built in March and a ramp down in automotive practice. It was also due to a one-off client bankruptcy (minus 30 bps), and a lower share of software in the revenue mix (20 bps).

 

Net new deal wins contracted were at $1.8 billion versus an average $2.4 billion for the past eight quarters. This was down 39.5 per cent Q-o-Q and a negative 7 per cent year-on-year (Y-o-Y).

 

Among segments, IT Services remained flat Q-o-Q in CC terms, while engineering, research and development (ER&D) declined 0.5 per cent Q-o-Q, and products declined 7.1 per cent.

 

Among verticals, financial services was up 3.7 per cent Q-o-Q in dollar terms, technology & services (up 5.9 per cent), manufacturing (up 1.3 per cent), retail & CPG (up 1.3 per cent) while telecom declined 4.5 per cent Q-o-Q and life sciences and public services remained flat. 

 

Region-wise, Y-o-Y in CC, Europe reported 9.6 per cent growth while the US reported 0.5 per cent growth.

 

Total headcount was flat (-0.1 per cent Q-o-Q) at 223,151 (added 1,984 freshers), while attrition was down 20 bps Q-o-Q to 12.8 per cent. The company announced restructuring in the auto vertical where the near-term outlook is challenging.

 

The company passed on productivity benefits to clients during Q1.

 

But HCLTech reported its lowest Q1 margin in several years. Artificial intelligence (AI) niche skills are being inducted at 3-4x the cost of normal skills, which will restrict margin expansion beyond FY26.

 

Business wise, margin contraction was visible in IT services and products business, impacting margin decline at the company level.

 

But the company won a large vendor consolidation deal in banking, financial services, insurance (BFSI) vertical, which will reflect in Q2 bookings.

 

Revenue visibility is strong for subsequent quarters with deals likely ramping up, and revenue growth guidance is achievable.

 

The stock had risen 17 per cent from the lows of April 2025, and it dropped over 3 per cent after the results.

 

It is trading at about PE26x to FY26 earnings, which are at premium to Infy and TCS.

 

Analysts’ opinion in terms of buy/ hold/ sell is divided but there have been downgrades in terms of target price and earnings.