Whalesbook
HCL Technologies reported a sharply disappointing end to its fiscal year 2026, with its March quarter results showing a significant sequential revenue contraction and squeezed profitability. This marked a stark reversal from the company's strong performance in the previous quarter.
Performance Decline
Constant currency revenues for HCL Tech's fourth quarter fell 3.3% sequentially to ₹33,981 crore. This followed a robust 4.2% growth in the December 2025 quarter, when revenues stood at ₹33,872 crore. The core IT services segment itself saw a 0.1% sequential decline in constant currency. The company, with a market capitalization around ₹3.91 trillion, is now facing questions about the sustainability of its growth trajectory.
Margins and Deal Wins Suffer
Profitability took a hit as operating margins compressed by 220 basis points quarter-on-quarter, settling at 19.5%. This was largely due to a rise in employee expenses, which increased to 57% of consolidated revenues, up from 55.7% in the prior period.
A key indicator for future business, the total contract value (TCV) of new deals, also saw a substantial drop. HCL Tech secured $1.93 billion in new TCV during the March quarter, a significant decrease from the $3 billion won in the December quarter. This slowdown in deal closures, alongside broader economic uncertainties, suggests potential challenges ahead for revenue generation.
Segment Weakness and AI Slowdown
Several business segments within HCL Tech showed signs of weakness. Beyond the 0.1% sequential decline in core IT services, the HCL Software division experienced a steep 28.1% sequential revenue contraction. This division's contribution to total revenues dropped from 11.2% to 8.3%.
Growth in advanced AI revenues, a crucial area for the IT sector, also decelerated. This segment grew 6.1% quarter-on-quarter to $155 million, a notable slowdown from the 19.9% growth seen in the previous quarter.
Cautious Outlook for FY27
Looking ahead, HCL Technologies has provided a conservative outlook for fiscal year 2027. The company anticipates services revenue to grow between 1.5% and 4.5% year-on-year in constant currency. This projection is considerably lower than its FY26 guidance, which ranged between 4.75% and 5.25%. This cautious forecast aligns with a broader, more uncertain outlook for the IT sector.
Valuation and Peer Comparison
HCL Technologies' current performance and future guidance present a challenge to its market valuation. The company trades at a consolidated price-to-earnings (P/E) ratio of approximately 22.8 times, higher than Infosys's P/E of around 18.5 times.
This premium valuation stands in contrast to its results. Competitors like Tata Consultancy Services (TCS) reported sequential revenue growth and expanded its operating margin to a four-year high of 25.3% in the same period. While Wipro showed year-on-year revenue growth, its net profit declined, and its operating margin was lower at 17.3%.
Analysts have previously flagged concerns. JPMorgan downgraded HCL Tech to 'neutral' in April 2025, citing weak Q4 performance, sluggish deal wins, and macroeconomic uncertainties. CLSA also downgraded the stock to 'Hold' in January 2026, pointing to a premium valuation and seasonal weakness. The rising employee costs and compressed margins add to the risks if revenue momentum does not recover swiftly.
The company's ability to reverse its current performance trend, improve profitability, and re-accelerate growth, especially in key areas like AI, will be critical. The muted FY27 guidance suggests management expects a period of slower expansion, making its premium valuation a key point for investors to watch.