HCL Technologies Downgrade to Rs 1300 by Prabhudas Lilladher
HCL Technologies Sees Weaker Demand Environment Amid Geopolitical Uncertainty
HCL Technologies' Q4 performance was significantly below expectations, with revenue declining 3.3% quarter-over-quarter (QoQ) constant currency (CC) versus our estimate of -2.0% and consensus of -1.6%. The miss was driven by weakness in the Services business, impacted by cancellation of discretionary programs in select telecom clients and termination of two SAP modernization engagements, which are expected to weigh on FY27E revenue by ~50 basis points. Beyond these specific headwinds, subdued discretionary spending amid geopolitical uncertainty, the near-term deflationary impact of AI, and continued softness in the Software segment are likely to weigh on growth.
The company's FY27E organic revenue guidance of 1-4% and Services revenue guidance of 1.5-4.5% point to a weaker demand environment, with the upper end contingent on a recovery in macro conditions. In response, we have revised our revenue growth estimates downward to 2.6% and 3.8% year-over-year (YoY) CC for FY27E and FY28E, respectively (vs. earlier 6.5% and 7.1%).
Margin Outlook
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On margins front, while FY26 restructuring impacts (~70 bps) are now behind us, ongoing investments in capability building are expected to keep margins under pressure. We therefore lower our EBIT margin estimates to 17.7% for FY27E and 18.0% for FY28E (vs. earlier 18.0% and 18.3%).
Updated Outlook and Recommendations
We now factor in a USD revenue compound annual growth rate (CAGR) of 3.3% and INR earnings per share (EPS) CAGR of 6.8% over FY26-28E. Consequently, we cut our target price-to-earnings (PE) multiple to 17x (from 20x) on FY28E earnings, leading to a revised target price of INR 1,300 (earlier INR 1,710). We downgrade the stock to REDUCE from BUY.
Revenue Growth Estimates
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| FY | Revenue Growth Estimate (YoY CC) | Previous Estimate |
|---|---|---|
| FY27E | 2.6% | 6.5% |
| FY28E | 3.8% | 7.1% |
Investor Takeaway
Investors should be cautious about HCL Technologies' revenue growth estimates due to a weaker demand environment.
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