While HCLTech surprised the Street with a cut in margin guidance and reported a lower-than-expected Q1 profit, analysts are largely brushing off the short-term margin pressure and anticipating it to be back to normal levels as early as the next fiscal— in line with the company’s outlook. On Tuesday, shares of the company closed more than 3% lower to Rs 1,567 on NSE.
HCLTech’s operating margin narrowed from 17.9% to 16.3% in the June quarter, missing estimates, due to higher investments in generative AI leading to higher expenses and primarily due to lower utilisation as employees released from certain projects could not be re-deployed in time. Due to these factors, and the restructuring it plans to undertake, the company also lowered it FY26 operating margin guidance to 17-18% from 18-19%.
Since these reasons seem transitory, the company expects margins to recover to the 18-19% range in FY27, noted HSBC Global Research in a report. Both TCS and HCLTech have stopped disclosing utilisation data and hence there is no way to track the decline or progress.
“HCLTech has performed well recently and is winning market share with improved traction in digital services. Also, its relatively smaller size should allow it to grow faster,” the report said. However, it believes that the stock is not cheap and so maintains its “hold” rating.
The brokerage cut its operating margins forecast for FY26 to 17.5%, now reflecting lower utilisation, expected headwinds from restructuring costs and continued investment in sales and marketing. This resulted in 3.8% cut in its FY26 earnings per share, but FY27 and FY28 EPS estimates are largely unchanged.
While most brokerages lowered estimates for FY26 to bake in the margin miss and kept FY27 estimates unchanged, Nomura lowered its FY27 earnings per share guidance by 2-5% while BNP Paribas lowered EPS estimates till FY28. Nomura added that it expects the Street to ignore near-term margin miss (as it is likely to reverse in FY27) and focus on continued revenue outperformance.
Revenue in Q1 came slightly ahead of expectations at Rs 30,349 crore, but registered a near flat growth over the March quarter.
“Unlike TCS, HCLT was confident of a stable to improving demand environment and expects a stepup in deal TCV for Q2FY26, which reflected in its growth-guidance raise. HCLT also sees revenue conversion from new large deals to be faster,” analysts at BNP Paribas noted in a report.
