HCL Technologies (HCLT IN) – Q2FY26 Result Update – Beat on result, investing for AI led growth… – Upgrade to ‘BUY’

The revenue growth performance was ahead of our estimates, attributed to the uptick in IT Service business (+2.6% QoQ CC) & part of the ER&D service growth (+2.2% CC QoQ) which was led by 2-month integration of HPE. Services business outperformance further de-risks the odds of achieving the upper end of the guidance band (4-5% YoY CC). The broad-based growth along with robust deal TCV is largely a function of revenue cannibalization from legacy opportunities to advanced AI-led spending. The growth was largely driven by short-burst deals and lower client pyramids, the growth within top 10 accounts was below company growth at 1.5% QoQ. The management is doubling down on AI strategy and striving IP-led revenue opportunities, the early success from experimentation to production-grade is reflecting in the revenue generated (USD100m) through Advanced AI. The focus is to be asset-light and building a layer of AI Engineering on top. However, the new opportunities would require continued investments in R&D activities and IP accelerators. Additionally, the compensation revision in H2 would keep the margins under pressure. We are baking revenue growth of 4.4%/6.4%/7.5% YoY CC, while expecting adj. margins to be at 18.0%/18.3%/18.6% over FY26E/FY27E/FY28E, respectively. Considering the early green shoots in pockets beyond FS, and incremental traction around advanced AI, we are upgrading to BUY (earlier ACCUMULATE). The stock is currently trading at 22x and 20x FY26/FY27E EPS, we roll forward to Sep’27 EPS and assign 22x for a TP of 1,760.