Motilal Oswal Financial Services has issued a Buy recommendation for HCL Technologies (HCLT) with a price target of Rs 2,300, implying a 23% upside from the current levels. HCLT's strong second-quarter performance for FY25, backed by broad-based growth and improved margins, reinforces its top position among large-cap IT stocks. The company continues to benefit from robust deal wins and a growing pipeline, particularly in emerging technologies such as data engineering and ERP modernization. Despite challenges in certain sectors like financial services and automotive, HCLT's diversified portfolio and leadership in the GenAI revolution make it a compelling investment for long-term investors.

Stock Performance and Target Price

HCL Technologies is currently trading at Rs 1,865. Motilal Oswal has set a 12-month target price of Rs 2,300, representing a 23% upside. The company has consistently demonstrated resilience in a challenging macroeconomic environment and remains a top pick in the IT services sector.

Key Financial Metrics:

Market Cap: Rs 5,036 billion (USD 59.9 billion)
52-Week Range: Rs 1,866 (high) - Rs 1,212 (low)
EPS Growth: 10.1% for FY25, 12.9% for FY26
P/E Ratio: 29.3x for FY25E, 25.9x for FY26E

Strong Q2FY25 Performance Drives Optimism

1. Revenue Growth Exceeds Expectations

HCL Technologies reported USD 3.4 billion in revenue for Q2FY25, marking a 1.6% QoQ growth and 6.2% YoY in constant currency (CC). This exceeded the previous estimate of flat growth. The company's New Deal Total Contract Value (TCV) was USD 2.2 billion, up 13% QoQ.

EBIT Margin: HCLT achieved an EBIT margin of 18.6%, significantly surpassing the estimated 17.4%, largely driven by growth in its high-margin product business.
2. Segment-Wise Performance

IT Business: Up 1.8% QoQ in CC terms.
Engineering and R&D Services (ER&D): Up 1.1% QoQ, demonstrating resilience despite sector-specific challenges.
Products and Platforms (P&P): Rose by 1.4% QoQ, benefiting from operational leverage.
The company's guidance for FY25 was revised upward, with revenue now expected to grow by 3.5%-5% YoY in constant currency, compared to the previous forecast of 3%-5%.

Growth Catalysts and Key Drivers

1. Expanding Deal Pipeline and Client Wins

HCLT's deal pipeline is at an all-time high, driven by increasing demand for data and AI services, as well as SAP application modernization programs, particularly in S4HANA migration. The company's ability to secure large-scale deals positions it well for sustained growth across multiple verticals.

Key Sectors: Healthcare, Manufacturing, and BFSI are expected to lead growth recovery in the upcoming quarters, with a focus on data engineering and enterprise resource planning (ERP) solutions.
2. Leadership in GenAI and Next-Gen Platforms

HCLT is positioned as a leader in the ongoing Generative AI (GenAI) revolution, with a comprehensive suite of solutions catering to AI-driven digital transformation. The company's AI Force platform has already gained traction with 25 clients, and additional demand is expected from its Tech AI Foundry and AI Labs initiatives.

Additionally, HCLT has made strategic acquisitions, such as Zeenea, a Paris-based GenAI and data modernization company, further bolstering its capabilities in AI and next-gen data platforms.

3. Margins and Financial Stability

The company's EBIT margin for FY25 is expected to remain within the 18%-19% range, thanks to strong performance in its products and platforms segment and continued operational efficiencies in services. Despite wage hikes and expected seasonal furloughs in Q3, HCLT's margin outlook remains strong.

EBIT Margin (Q2FY25): 18.6% (up from 17.4%).
PAT: Rs 42 billion in Q2FY25 (up 10.5% YoY).

Sector Challenges and Risks

1. Financial Services Weakness

While HCLT reported strong performance across most sectors, the Financial Services vertical saw a 4.5% YoY decline in constant currency, primarily due to the impact of the State Street divestment, which led to a USD 30 million revenue loss. Despite this, the broader BFSI segment is expected to recover, driven by improved discretionary spending.

2. Automotive Sector Pressures

In the Manufacturing vertical, HCLT faces challenges in the European automotive sector, where a few large clients have initiated cost reductions. However, these headwinds are being offset by the company's SAP application modernization efforts in other industries.

Investment Outlook and Valuation

Motilal Oswal remains bullish on HCLT, citing its strong financial performance, leadership in GenAI, and expanding client base as key drivers of future growth. The research house values HCLT at 30x Sep’26E EPS, reiterating a Buy rating with a target price of Rs 2,300, indicating a 23% upside.

Valuation Metrics:

P/E Ratio: 29.3x FY25E, 25.9x FY26E
Dividend Yield: Expected to grow from 3.1% in FY25 to 3.9% in FY27
RoE: Estimated at 25.6% for FY25 and rising to 33.1% by FY27

Conclusion: A Strong Buy for Long-Term Investors

HCL Technologies continues to demonstrate its strength across multiple verticals, benefiting from increased demand for data modernization, AI-driven solutions, and a diversified portfolio. With a robust deal pipeline, strategic investments in next-gen technologies, and a solid financial outlook, HCLT remains well-positioned for sustained growth.

Motilal Oswal's Buy recommendation with a target price of Rs 2,300 reflects confidence in the company's ability to capitalize on market opportunities and deliver value to shareholders over the next 12 months.