Sharekhan's research house has maintained its BUY recommendation for HCL Technologies with a revised price target of Rs. 2,120, reflecting an upside potential. HCL Technologies posted robust second-quarter results, surpassing expectations on revenue and profitability. The company reported a revenue of $3,445 million, growing 1.6% quarter-on-quarter (q-o-q) and 6.2% year-on-year (y-o-y) in constant currency (CC) terms. With an EBIT margin expansion of 150 bps to 18.6%, HCL’s operational efficiency continues to impress, aided by new deal wins of $2,218 million in total contract value (TCV). The company’s strong financial health and deal pipeline are expected to drive growth, making HCL Technologies an attractive investment.

Financial Performance

Revenue Growth Exceeds Expectations
HCL Technologies delivered revenue of $3,445 million, up 1.6% q-o-q in CC terms, outperforming Sharekhan's estimates of 0.6% q-o-q growth. Revenue in rupee terms stood at Rs. 28,862 crore, marking a growth of 2.9% q-o-q and 8.2% y-o-y. Service revenue rose by 1.6% q-o-q, primarily driven by efficiencies and software revenue, which increased by 1.4% q-o-q. Growth in the Financial Services sector, excluding the impact of the State Street divestiture, was over 4% q-o-q.

EBIT Margin Expansion
HCL’s EBIT margin expanded by 150 basis points quarter-on-quarter, reaching 18.6%, beating the estimated margin of 17.9%. This was driven by strong operational execution, with software and services contributing to the margin uplift. Management’s guidance remains steady, maintaining the EBIT margin in the range of 18-19% for FY25.

Deal Pipeline and Bookings

New Deal Wins Show Mixed Results
HCL Technologies secured $2,218 million in new deals, which is 13% up q-o-q but 44% lower y-o-y. This performance aligns with expectations but slightly lags behind the eight-quarter average. The deal wins were primarily led by a strong mix of both services and software deals.

Growth Outlook
With the first half of FY25 performing better than expected, management has raised its revenue growth guidance to 3.5-5% in CC terms, reflecting a positive business outlook. The company’s ask rate for the second half of FY25 stands at a modest 0-2%, indicating the achievable growth trajectory for the next two quarters.

Key Positives

Client Expansion in Higher Value Deals
HCL added four clients each in the $50 million+ and $20 million+ categories, underscoring the company’s ability to secure high-value contracts.

Strong Growth in Core Verticals
The Financial Services vertical grew 4% q-o-q, excluding the impact of the State Street divestiture, which reflects the company's resilience in the sector. Additionally, the Technology and Services, Manufacturing, Retail & CPG, and Lifesciences & Healthcare verticals witnessed significant growth, contributing to a balanced revenue stream across geographies.

Operational Efficiency Boosts Profitability
The EBIT margin growth of 150 bps was primarily attributed to better cost management and favorable exchange movements. This margin improvement demonstrates HCL’s effective operational strategy, which continues to drive profitability.

Key Negatives

Moderation in Deal Wins
While TCV from new deals increased 13% q-o-q, the overall decline of 44% y-o-y reflects a moderation in deal wins. This slowdown is primarily due to the global macroeconomic environment, impacting client discretionary spending.

Increase in Outsourcing Costs
Outsourcing costs surged to Rs. 3,748 crore, up 5.8% q-o-q, reflecting a higher expenditure on external services. This increase in costs may continue to pressure margins if not managed effectively.

Decline in Headcount
The total headcount dropped by 780 employees, bringing the total workforce to 218,621. While HCL maintains strong profitability, the reduction in personnel could reflect cautionary measures in response to global macroeconomic conditions.

Management Commentary

Revenue and Profitability Guidance
Management remains optimistic about the company’s revenue growth, raising the upper end of its guidance to 3.5-5% in CC terms for FY25. EBIT margins are expected to remain in the range of 18-19%. Business momentum is gaining traction across key verticals, especially in technology services, life sciences, and retail, while the impact of macroeconomic headwinds is expected to soften in the upcoming quarters.

Strategic Focus on AI and Automation
The company continues to see strong demand in AI and GenAI-related services, with offerings such as AI Force and Enterprise AI Foundry driving growth. These capabilities will likely contribute to new deal wins in the near future.

Valuation and Recommendation

Maintain BUY with a Price Target of Rs. 2,120
Sharekhan has revised its price target for HCL Technologies to Rs. 2,120, reflecting a valuation of 28x September FY26E EPS. At the current market price (CMP) of Rs. 1,856, the stock trades at 28.9/26/23.1x its FY25/26/27E EPS, offering a compelling value for long-term investors. The stock’s Price-to-Earnings (P/E) ratio and growth potential remain attractive, positioning it as a strong buy among Tier-1 IT services companies.

Investment Risks

Currency Volatility
The appreciation of the rupee or adverse cross-currency movements could negatively impact HCL’s revenue and margins, especially given its significant international exposure.

Global Economic Headwinds
Macroeconomic uncertainties, particularly in the US and European markets, could lead to a reduction in discretionary IT spending by clients, potentially moderating growth in the coming quarters.

In conclusion, HCL Technologies remains a strong player in the IT services industry, with its operational efficiency, robust deal pipeline, and strategic focus on AI-driven growth. The stock continues to offer significant upside, making it a BUY for investors looking for stable, long-term gains.