Whalesbook
HCL Technologies posted a robust Q2 FY26, driven by services, including IT & Business Services and Engineering & R&D. The company achieved a 2.8 percent reported and 2.4 percent Constant Currency (CC) revenue growth sequentially. While HCL software's growth was softer, subscription and support services performed well, offset by perpetual licenses. Key markets like the US and Europe showed strength, with technology, telecom, financial services, and retail industries leading growth. HCL Technologies notably became the first Indian IT firm to disclose its Advanced AI revenue, which stood at $100 million, approximately 3 percent of its total revenue.
Following this performance, HCL Tech has revised upwards the lower band of its full-year services revenue growth guidance to 4-5 percent in Constant Currency, from the previously guided 3-5 percent. The overall revenue growth guidance remains unchanged at 3-5 percent.
Margins saw a sequential improvement of 116 basis points. This gain was driven by factors like higher utilization and favorable foreign exchange rates, which more than offset restructuring expenses related to AI investments and go-to-market strategies. However, the company anticipates a drag on margins in Q3 and Q4 due to annual wage hikes. Full-year margin guidance is maintained at 17-18 percent, with normalization expected in FY27.
Order inflows were strong at $2.6 billion, benefiting from spillover orders. The company is also focusing on non-linear growth through automation, leading to improved revenue per employee, even as headcount additions remained strong, signaling confidence in future demand.
Impact:
This news is significant for investors as it indicates HCL Technologies' ability to execute its growth strategy, particularly in advanced areas like AI. The upward revision in services revenue guidance suggests stronger business momentum than previously anticipated, which can positively impact the company's stock performance. The focus on non-linear growth and IP-based services also signals a strategic shift towards higher-value offerings. The valuation is considered undemanding by analysts, presenting potential upside for long-term investors.
Rating: 8/10
Difficult Terms Explained:
Constant Currency (CC): A method of reporting financial results that excludes the effects of foreign currency fluctuations, providing a clearer view of underlying business performance.
IT & Business Services: Refers to services related to information technology infrastructure, applications, and business process outsourcing.
Engineering & R&D: Services focused on research, development, and engineering activities for clients, often involving product design and innovation.
Perpetual Licenses: A one-time purchase of software rights that allows the user to use the software indefinitely, as opposed to subscription-based licensing.
Basis Points: One-hundredth of a percentage point (0.01%). Used to express small changes in percentages, especially in finance and interest rates.
Non-linear growth: Growth that is not directly proportional to the input of resources (like headcount). It implies achieving more output with less proportional input, often through efficiency gains, automation, or intellectual property.
Automation: The use of technology to perform tasks with minimal human intervention.
IP (Intellectual Property): Creations of the mind, such as inventions, literary and artistic works, designs, and symbols, which can be leveraged to generate revenue.
Platform-based services: Services delivered through an integrated set of technologies and tools that provide a foundation for developing and deploying applications or solutions.
Overweight Rating: An investment recommendation indicating that a stock is expected to perform better than the average stock in its sector or the broader market.