HCL Technologies AI margins strengthen as deal wins offset cautious growth outlook

Investment View and Valuation

Prabhudas Lilladher's October 13, 2026 Q2 FY27 result update on HCL Technologies retains a HOLD recommendation with a target price of Rs 1,230. The broker characterises the quarter as one of strong execution, but with the outlook maintained.

Higher-margin advanced AI offerings, resilient services growth and strong deal bookings are positive. However, software weakness and management's cautious outlook limit the near-term case.

The target price of Rs 1,230 is based on 15 times September 2028E EPS.

Q2 FY27 Financial Performance

HCL Technologies reported Q2 FY27 revenue growth of 2.3 per cent quarter on quarter in constant currency, marginally below Prabhudas Lilladher's 2.4 per cent expectation and consensus of 2.7 per cent. Services grew 3.0 per cent quarter on quarter in constant currency, while Software revenue declined 5.8 per cent.

Growth was led by Telecom, Media, Publishing and Entertainment, Retail and CPG, and Financial Services, while Public Services declined.

Margin Expansion and Workforce Trends

The main earnings positive was the adjusted EBIT margin of 19.0 per cent, which was ahead of both Prabhudas Lilladher's 17.7 per cent estimate and consensus of 17.5 per cent. Margin tailwinds included Project Ascent, higher-margin advanced AI revenue, operating leverage and rupee depreciation. These benefits were partly offset by the HPE Telco Solutions acquisition.

Adjusted PAT increased 12.2 per cent quarter on quarter to Rs 54 billion, supported by the operating-margin beat. The board declared an interim dividend of Rs 12 per share.

HCL Technologies added 6,400 net employees, including 6,100 freshers. LTM attrition increased 10 basis points sequentially to 12.8 per cent.

Advanced AI and Deal Momentum

Advanced AI revenue was US$219 million, up 28.4 per cent quarter on quarter and 78 per cent year on year in constant currency. This represents an annualised run rate of US$876 million.

Management said advanced AI carries margins 7 to 10 per cent higher than traditional services and can help offset AI-related deflation in conventional services. It also sees partnerships with frontier model providers and its AI factory proposition helping HCL Technologies address enterprise AI spending across infrastructure, data, models, applications and operations. Scaling the AI business, however, requires continued investment in talent and capabilities.

Deal total contract value was US$3.26 billion, up 35.4 per cent sequentially and 26.8 per cent year on year, making it HCL Technologies' second-highest quarterly deal-win level. Management stated that AI was central to every large deal and that wins were broad-based across verticals.

HPE Telco Solutions and Jaspersoft together provided US$35.6 million of inorganic revenue and 97 basis points of sequential growth in Q2 FY27. Management expects 10,000 to 11,000 fresher hires in FY27 and is building an enterprise-wide FDE academy.

FY27 Outlook and Software Headwinds

Management narrowed FY27 constant-currency consolidated revenue growth guidance to 2.5 to 4.0 per cent from 1.0 to 4.0 per cent. Services growth guidance was narrowed to 3.0 to 4.0 per cent from 1.5 to 4.5 per cent, while EBIT-margin guidance remains 17.5 to 18.5 per cent.

Software remains an important concern because the transition from perpetual licences to subscriptions continues to weigh on consolidated growth. Management attributed Q2 Software softness partly to fewer multi-year licences due for renewal, rather than to underlying business health.

Broker Estimate Changes and Forecasts

Following the Q2 execution, Prabhudas Lilladher raises its FY27 services-growth assumption to 3.8 per cent from 3.2 per cent and its FY27 EBIT-margin forecast to 18.2 per cent from 17.8 per cent. It leaves FY28E and FY29E estimates largely unchanged.

Key Factors Affecting the Thesis

• Sustainability of AI-led margin benefits and services momentum.
• Conversion of the strong bookings pipeline.
• Progress of the software subscription transition.
• Management's continued caution on organic growth.