HCL Tech: Despite strong deal wins, risk-reward remains unfavourable

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HCL Technologies Ltd did better than expected on select parameters in the June quarter (Q1FY27)—a seasonally weak one for the company. Sequentially, constant currency (CC) revenue for IT services segment was flat; for engineering and R&D it fell 3.7%, hurt by discretionary spending cuts at two US telecom clients; and for software the metric rose 2.2%.

Total contract value (TCV) of net new deal wins at $2.41 billion was solid and highest-ever Q1 bookings, versus $1.94 billion in Q4FY26. Q1 deal wins were broad-based across geographies and segments. Earnings before interest and tax (Ebit) margin rose 40 basis points sequentially to 16.9%, marginally ahead of consensus estimates. Expansion was aided by restructuring savings and forex benefits, partially offset by seasonal headwinds and lower engineering and R&D (ERD) revenue.

Despite select bright spots, HCL retained CC FY27 guidance for overall and IT services revenue growth at 1–4% and 1.5–4.5%, respectively. With macro conditions unchanged from last quarter and continued headwinds at two key accounts, HCL has held off on revising its targets. Also, the recently-inked mega deal worth $1.14 billion with a European Global F-50 company is expected to start contributing from FY28. “HCL needs 1.5% compound quarterly growth rate for the next three quarters to achieve the mid-point of the services revenue guidance – decent order book provides some comfort,” said JM Financial Institutional Securities.

But client-specific issues in some verticals could prove growth dampeners. The management said that banking, financial services, and insurance (BFSI) remains its strongest vertical, supported by AI-led wallet share gains and healthy demand for data and analytics. Technology and telecom are feeling the heat of weak discretionary spending. Life sciences & healthcare continues to face headwinds from the rollover of earlier regulatory programs and a weak US healthcare market.

In its Q4FY26 earnings call, HCL management cautioned that AI-driven deflation could lower revenue by 2–3% across its portfolio. “This sets a negative outlook for the next few years and not increasing the FY27 revenue growth guidance despite better-than-expected revenue growth and strong TCV numbers leads us to believe that revenue deflation will be seen sooner than expected,” said Nirmal Bang Institutional Equities.

The Jaspersoft acquisition has been completed, but as per the management, its FY27 revenue growth guidance is entirely organic. The acquired business is expected to contribute $10-15 million per quarter from Q2FY27. Ebit margin guidance was maintained at 17.5–18.5%, which already includes restructuring costs. Margins are expected to be range-bound through FY27-28 as AI investments offset operating leverage.

HCL’s Advanced AI revenue (nearly 4.7% of overall revenue) increased to $171 million, up 10.6% sequentially in CC terms. HCL is entering the AI data centre business targeting full-stack AI infrastructure and managed services. An initial ₹3,500 crore investment is planned toward a 50MW AI data centre capacity with the overall opportunity potentially requiring around ₹35,000 crore, to be funded through a mix of debt, equity and partnerships. Also, in June, HCL acquired a 10.5% stake for $150 million in Sarvam AI, which is India’s full stack sovereign AI company.

So far in 2026, HCL shares are down 27%. It trades at FY28 price-to-earnings multiple of 15—a premium to larger peers Tata Consultancy Services and Infosys, shows Bloomberg data. HCL’s narrowing growth differential, now coupled with data centre investment risk, makes the risk-reward unattractive, said a Nuvama Research report dated 14 July.

Harsha Jethmalani is a Deputy Editor at Mint with over a decade of experience covering stock markets and corporate India. As a key member of the Mark to Market team, she specializes in delivering cutting-edge commentary...