HCLTech's stock experienced a decline of 2% following the release of its Q1FY26 earnings report, which revealed a mixed performance and led to divided opinions among analysts regarding the company's outlook. While revenue saw some growth, profit margins faced pressure, prompting a revision in the company's EBIT margin forecast for FY26.

Q1FY26 Performance Highlights

HCLTech posted a consolidated revenue of ₹30,349 crore for Q1 FY26, which represents a 0.3% increase quarter-on-quarter (QoQ) and an 8.2% increase year-on-year (YoY). In constant currency (CC) terms, the revenue decreased by 0.8% QoQ but increased by 3.7% YoY. The company's USD revenue was $3,545 million, up 1.3% QoQ and 5.4% YoY.

However, the company's consolidated net profit saw a 9.7% decline to ₹3,843 crore, compared to ₹4,257 crore in the same quarter last year. The EBIT for the quarter was ₹4,942 crore, which is 16.3% of revenue, reflecting a 9.2% QoQ decrease but a 3.1% YoY increase.

Margin Pressures and Contributing Factors

HCLTech's operating margin came in at 16.3%, which was less than the Bloomberg estimate of 17.45%. Several factors contributed to this margin squeeze, including:

• Underutilization of AI Team: Approximately one-third of HCLTech's AI-focused team, onboarded in March, remained underutilized, leading to an estimated 80 basis points reduction in Q1 margins. This underutilization stemmed from a large ramp-up to build capacity for specialized skills in conversational AI, a ramp-down in the automotive sector, and an inability to redeploy employees due to skill and location mismatches.
• Investments in Gen AI and GTM: Additional investments in Gen AI (Generative AI) and Go-To-Market (GTM) initiatives also impacted the operating margin.
• Lower Utilization: CEO C Vijayakumar noted that margins fell short of expectations due to lower utilization, which was impacted by a delay in ramp-up for a specific program.

Revised Guidance and Analyst Outlook

In light of these margin pressures, HCLTech revised its EBIT margin guidance for FY26 from 18%-19% to 17%-18%. The company's revenue growth guidance for FY26 is projected to be between 3.0% and 5.0% YoY in CC. Services revenue growth is also expected to be between 3.0% and 5.0% YoY in CC.

Analysts have expressed divided opinions on HCLTech's outlook. Some anticipate a modest performance amid global economic uncertainties, while others expect the BFSI, hi-tech, and healthcare services sectors to show some recovery.

• Axis Securities expects HCL Tech to report revenue growth of 0.3% QoQ and operating margins to contract.
• Antique Stock Broking anticipates a decline in margins due to the lack of growth momentum but expects HCL Technologies to maintain its FY26 revenue growth guidance at 0%–3% and 2%–5% in constant currency terms.
• HSBC has raised its target price for HCLTech but maintains a 'Hold' rating, citing limited upside from current levels.

Strategic Focus and Future Expectations

Despite the margin pressures, HCLTech is not pulling back on hiring and plans to hire more people in FY26 than in FY25, with a focus on specialized roles. The company's management believes that restructuring and optimization efforts will play out in the second and fourth quarters, potentially scaling margins to the 18–19% range.

HCLTech is also focused on its AI offerings and partnerships, including its collaboration with OpenAI. The company's CEO, C Vijayakumar, stated that HCLTech's AI propositions are resonating well with clients.

Other Key Metrics

• New Deal Wins: HCLTech reported a total contract value (TCV) of $1,812 million in Q1FY26 from new deal wins, which is lower than the $1,960 million in Q1FY25.
• Attrition Rate: The company's attrition rate stood at 12.8% in the June quarter.
• Dividend: HCL Tech announced an interim dividend of ₹12 per share for the financial year 2025-26.

In conclusion, HCLTech's Q1FY26 results reflect a mixed performance in a challenging global environment. While revenue has grown, margin pressures have led to a revised outlook and divided opinions among analysts. The company's strategic focus on digital transformation, AI, and key partnerships, along with cost optimization efforts, will be crucial in navigating the evolving IT landscape and achieving its financial goals.