HCL Technologies AI-led margins improve as software weakness constrains growth visibility

Investment View and Recommendation

LKP Research’s October 13, 2026 Q2 FY27 result update presents a mixed quarter for HCL Technologies. LKP downgraded the stock from BUY to HOLD while retaining its Rs 1,360 target price.

Healthy Services growth, strong deal bookings, better-than-expected margins and growing AI monetisation remain supportive. However, LKP sees limited valuation upside because organic growth remains low, HCL Software’s performance is weak and discretionary technology spending remains uncertain.

Q2 FY27 Financial Performance

Revenue growth was softer than LKP’s expectation, although EBIT margin expanded 130 basis points quarter-on-quarter to 18.2%, ahead of LKP’s 16.9% estimate.

Margin Drivers and AI Monetisation

The margin outperformance was supported by Project Ascend efficiencies, higher-margin Advanced AI offerings, operating leverage and favourable foreign exchange. These benefits were partly offset by restructuring expenses and the acquisition-related drag from HPE’s Telco Solutions Group.

• Project Ascend efficiencies contributed 73 basis points.
• Advanced AI offerings contributed 32 basis points.
• Operating leverage contributed 50 basis points.
• Favourable foreign exchange contributed 23 basis points.

Advanced AI revenue reached USD 219 million, rising 28.4% sequentially and approximately 78% year-on-year in constant currency. LKP notes that Advanced AI IP and platform offerings have gross margins above 70%, while AI services deliver margins 7 to 10 percentage points above traditional services.

Growth Outlook and Deal Bookings

Management retained FY27 constant-currency revenue growth guidance of 2.5% to 4.0% for the consolidated business and 3% to 4% for Services, including inorganic contributions. Management expects Services growth to be slightly above the midpoint and retained EBIT margin guidance of 17.5% to 18.5%.

Acquisitions added USD 35.6 million and 97 basis points to sequential growth. This included approximately USD 21 million from HPE Telco Solutions over two months and approximately USD 15 million from Jaspersoft.

New bookings reached USD 3.3 billion, up 35% quarter-on-quarter and 27% year-on-year. This represented the second-highest quarterly order book in HCL Technologies’ history. The Mercedes-Benz mega deal improves revenue visibility, although execution is expected to begin in FY28E and may initially dilute margins.

HCL Software and Organic Growth Concerns

Software remains the principal concern. Upfront multi-year licence revenue declined to USD 39 million from USD 81 million in Q2 FY26. Software ARR grew 7.6% year-on-year to USD 1.13 billion including acquisitions, but organic ARR growth was only approximately 2.6%.

Management expects renewal activity to improve in FY28 and FY29 as multi-year contracts mature. LKP nevertheless flags continued software volatility and weak organic growth as key concerns.

Risks

• Potential AI-led deflation.
• Competitive pricing and margin pressure.
• Continued volatility in the Software business.
• Weak organic growth.
• Uncertain discretionary technology spending.

Estimates and Valuation

LKP estimates USD revenue CAGR of 4.4% over FY27E to FY28E and INR EPS CAGR of 11.8%, supported by inorganic growth, operating efficiencies and currency. It broadly retains EBIT margin assumptions of 17.8% for FY27E and 18.0% for FY28E.