HCL Tech wins record deals but AI deflation and new bets weigh

HCL Technologies reported $2.41 billion in total contract value for the June quarter, its highest-ever first-quarter bookings, up from $1.94 billion in the prior quarter. Earnings before interest and tax margins rose 40 basis points sequentially to 16.9%, aided by restructuring savings and favorable forex. However, underlying growth was mixed: IT services revenue was flat in constant currency terms, while engineering and R&D revenue fell 3.7% due to discretionary spending cuts at two US telecom clients.

Despite the strong order book, management retained its full-year constant currency revenue growth guidance of 1% to 4% for the group and 1.5% to 4.5% for IT services. A newly signed $1.14 billion deal with a European Global F-50 company will not contribute until fiscal 2028. "HCL needs 1.5% compound quarterly growth rate for the next three quarters to achieve the mid-point of the services revenue guidance – decent order book provides some comfort," said JM Financial Institutional Securities.

The reluctance to raise targets reflects lingering macroeconomic headwinds in technology, telecom, and life sciences, alongside a structural threat from artificial intelligence. Management previously cautioned that AI-driven deflation could reduce revenue by 2% to 3% across its portfolio. “This sets a negative outlook for the next few years and not increasing the FY27 revenue growth guidance despite better-than-expected revenue growth and strong TCV numbers leads us to believe that revenue deflation will be seen sooner than expected,” said Nirmal Bang Institutional Equities.

The company is attempting to offset these pressures through acquisitions and new infrastructure ventures. The completed Jaspersoft acquisition is expected to add $10 million to $15 million per quarter starting in the second quarter, though this is excluded from organic guidance. Furthermore, HCL is entering the AI data centre market, planning an initial ₹3,500 crore investment for a 50MW facility, with a total opportunity of around ₹35,000 crore funded through debt, equity, and partnerships. It also acquired a 10.5% stake in Sarvam AI for $150 million in June.

These capital deployments coincide with constrained operating leverage, as management warned that AI investments will keep Ebit margins range-bound at 17.5% to 18.5% through fiscal 2028 despite Advanced AI revenue growing 10.6% sequentially to $171 million. The stock has fallen 27% in 2026 yet trades at a fiscal 2028 price-to-earnings multiple of 15, a premium to larger peers Tata Consultancy Services and Infosys. Analysts at Nuvama Research noted that HCL's narrowing growth differential combined with data centre investment risk makes the risk-reward profile unattractive.