Nuvama Institutional Equities downgraded HCL Technologies to a ‘Hold’ rating from ‘Buy’ as it sees limited valuation upside in the stock. The brokerage house slashed the target price by 4.1% to Rs 1,630 from Rs 1,700. The downgrade came after the company posted weak quarterly results.
Nuvama on HCL Tech: Seasonality impacted growth, low margins a shocker
The tech giant’s revenue declined 0.8% sequentially due to Q1 seasonality. The services business inched down 0.1% Quarter-on-Quarter (QoQ) and ER&D 0.5% QoQ, while IT Services was flat QoQ. However, the growth was led by the tech vertical, which rose 13.7% YoY, along with the 6% contribution from the deal ramp-up since March.
But for Nuvama, the fall in EBIT margin was a shocker, down 160 basis points QoQ, to 16.3%. Headwinds from lower utilisation (fall of 80 bps), higher sales & marketing investment (down 30 bps), one-off impact including client bankruptcy (down 30 bps) and other factors (fell 20 bps) were partially offset by Project Ascend.
Nuvama on HCL Technologies: Fall in FY26 growth guidance, margin guidance cut
HCL Technologies revised the FY26 revenue growth guidance to 3–5% from 2–5% YoY and adjusted margin guidance to 17–18% from 18–19%.
The reduction in margin guidance was due to a lower margin in Q1 (down 20 bps), lower utilisation in FY26 ( down 10–20 bps), investments in AI, sales & marketing (down 30 bps), and restructuring of the organisation (down 30–40 bps).
However, HCL Tech’s management intends to improve the margin back to 18–19% by the end of the year. TCV came in at $1812 million, a fall of 39% QoQ and 8% YoY. Some of the large deals were spilled into Q2 due to procedural delays; those deals are closed now and are expected to lead to higher deal wins in Q2.
All in all, the weak margin in Q1 FY26 and the slash in growth guidance leave HCL Tech with almost zero EPS growth in FY26. “We continue to like HCL Technologies’ revenue growth profile as it remains the fastest-growing company in the Top 5. However, earnings growth has taken a hit due to lower margin expectations. Also, with the recent run-up, it is now trading at a slight premium to TCS and Infosys, leaving limited upside potential,” said Nuvama.