HCLTECH - HCL Technologies Ltd Share Price

Management provided an outlook for FY'27 with the following key points:

1. Revenue Growth Guidance: Management expects revenue growth in a range of 1% to 4% in constant currency. For Services, the guidance is set at 1.5% to 4.5%.

2. EBIT Margin Expectations: The EBIT margin guidance is between 17.5% and 18.5%. The lower end reflects a continued soft discretionary spending environment coupled with challenges from two specific clients. The midpoint assumes consistent discretionary spending, while the higher end anticipates a moderate pickup in spending and the materialization of large deals in the first half of FY'27.

3. Impact of Client Challenges: The company noted that two significant clients in different sectors are experiencing business challenges unrelated to macroeconomic conditions, leading to a scaling down of their IT budgets. This is expected to contribute to approximately 50 basis points of growth headwind for FY'27.

4. Sector-Specific Contributions: HCL's services business achieved a growth of 4.8% in FY'26, propelled by IT and Business Services (3.7% growth) and Engineering and R&D Services (9.8% growth). Management anticipates this growth to be impacted by ongoing challenges in discretionary spending, particularly in the Telecom vertical.

5. AI Strategy and Market Positioning: The management highlighted ongoing strong momentum in AI services, with Advanced AI revenue reaching $620 million for the fiscal year. There's a focus on expanding AI-aligned offerings and scalable services that could grow at rates of 25% to 30%.

Overall, management's tone suggested cautious optimism, acknowledging both ongoing challenges and the potential for growth, particularly in AI-native services.

Question 1: "What is the risk that the 3% to 5% deflation number keeps expanding over the next 2 to 3 years as model capabilities improve?"

Answer: The 3% to 5% deflation estimate is primarily based on our service mix. While model enhancements will increase efficiency in the software development lifecycle, the actual impact on deflation depends on client engagement levels. For us, I believe we'll remain within the 2% to 3% deflation range, considering how new models integrate human input. Areas like Agentic AI show promise, but we anticipate stable deflationary impacts overall.

Question 2: "Which of your GenAI offerings are seeing the maximum uptake, and where do you expect to see significant growth in the next 2 to 3 years?"

Answer: Our AI Factory is gaining substantial traction; we've secured a $100 million deal for implementing next-gen AI data centers. Similarly, our Semiconductor Engineering initiative is thriving with a new ASIC development project in Physical AI. These areas are where we see a considerable increase in engagement, which we believe will help offset the impacts of industry deflation.

Question 3: "How much of the guidance softness comes from geopolitical pressures and how much from recent events like the release of Opus 4.6?"

Answer: I want to be precise here. The guidance reflects specific challenges from two Telecom clients significantly reducing discretionary spending, unrelated to broader geopolitical issues. These cuts were communicated recently and affect FY'27 by roughly 50 basis points. March's issue in procurement also contributed to the revenue decline but can't be solely attributed to geopolitical events.

Question 4: "Are the two SAP programs overlapping with the two Telecom accounts, and what gives you confidence that these are isolated events?"

Answer: The Telecom issues and SAP cancellations are separate incidents. Our confidence stems from the focused nature of these challenges; the guidance reflects ongoing softness in these specific accounts rather than broader trends. We've factored potential continuing impacts into our lower guidance estimates but remain optimistic about overall demand.

Question 5: "Is the sequential softness in Telecom a fair assumption for a full quarter impact, possibly around a 1% drag?"

Answer: Yes, it's accurate to expect a full quarter's impact, although the communication in March indicated challenges that were already known. We've accounted for this in our guidance, understanding it may exceed a month's impact, extending through the year as we navigate these decisions in the budget context.

Question 6: "On the cancellation of the SAP programs, is this a purely budgetary decision or does it involve technological factors?"

Answer: The cancellation was primarily a budget decision. Clients deprioritized these modernization efforts amid budget constraints. This indicates a shift in their strategic focus rather than an outright rejection of technology, suggesting adjustments in project timelines aligned with shifting budgetary priorities.

Question 7: "Given the product business is down 4% YoY, can we anticipate revenue missed in Q4 to rebound in Q1, improving next year's outlook?"

Answer: It's tough to predict whether this missed revenue in Q4 will rebound quickly, as it depends on various factors. Note that our growth in Software remains slower, so while some recovery is possible, we are cautious about overall expectations based on the current volatility in project closures and client decision-making.

Question 8: "Regarding client-specific issues, is the manufacturing client predominantly in ER&D or IT services?"

Answer: The manufacturing client is involved in both, utilizing our engineering services and BPO. The Telecom clients deal specifically with discretionary spending in digital business under our ITBS portfolio and don't overlap with the manufacturing or retail client challenges we've noted in our guidance.

Question 9: "Is there scope for work with hyperscalers, and how does it differ from enterprise customer engagements?"

Answer: We definitely engage with hyperscalers, which involves managing distinct technologies and operational frameworks. Our teams have been retrained to cater to this, focusing on managing networks and operational workflows that differ significantly from traditional enterprise engagements, reflecting an evolution in our capabilities.

Question 10: "Is the deflation seen due to AI integration a new phenomenon, or has it existed prior, alongside an expectation of recovery?"

Answer: While deflationary pressures exist, we're careful to identify these as incremental, especially with new AI capabilities emerging. Over the past couple of years, we've monitored softening demand and expect slight recovery moving forward, with a cautious but sustainable outlook amidst various market disruptions.