LKP Research has moved HCL Technologies to a hold rating despite the company's recent margin improvement and strong deal bookings. While HCLTech reported an 8% stock rally on October 13 following its Q2 FY2027 results, analysts cite persistent weakness in the software division and macroeconomic headwinds as reasons for the cautious outlook.
LKP Research has adjusted its rating on HCL Technologies to a hold, citing concerns over long-term earnings growth despite the company’s recent operational successes. The brokerage maintained a price target of Rs 1,360 for the stock. This shift comes as the IT major navigates a period where strong operational metrics are being challenged by structural weakness in its software business.
Mixed Results and Segment Performance
HCL Technologies reported its financial results for the second quarter of fiscal year 2027 on October 12. The company’s performance presented two contrasting stories for investors. On one hand, operational efficiency was a clear positive, with EBIT margins expanding by 131 basis points to reach 18.2%. This margin improvement was supported by the company’s internal initiatives focused on cost control and the integration of advanced artificial intelligence services. Additionally, total deal bookings reached USD 3.3 billion, marking a significant 27% increase compared to the previous year, which signals sustained demand in the services segment.
On the other hand, the software business continues to struggle. This segment reported a contraction of 5.8% compared to the previous quarter and an 11.2% decline year-on-year in constant currency. The timing of multi-year license renewals has contributed to this volatility, creating pressure on the top line. Following the announcement of these results, the company’s stock witnessed a positive market reaction, rallying over 8% on October 13, as the market digested the overall financial performance and an announced interim dividend of Rs 12 per share, which has a record date of October 16, 2026.
Growth Challenges and Outlook
The brokerage’s move to a hold rating reflects a cautious view on the company's growth trajectory. While the services business is performing well, the broader macroeconomic environment poses risks. Specifically, analysts have pointed to potential challenges from artificial intelligence-led deflationary pressures, where the productivity gains from AI may outpace the actual monetization of these services. Additionally, there is uncertainty regarding how quickly the current, strong deal pipeline can be converted into recognized revenue.
Management has maintained its guidance for the full fiscal year 2027, projecting revenue growth in the range of 2.5% to 4.0% in constant currency, with EBIT margins targeted between 17.5% and 18.5%.
For shareholders and market observers, the primary factor to monitor will be whether the company can stabilize its software business and successfully improve the conversion of its large deal bookings into revenue. The balance between maintaining these higher margins and achieving organic growth will determine the company's earnings trajectory in the coming quarters.