HCL sails through Q2 smoothly. Now it's preparing for the AI battleground

Revenue growth was driven by improved sequential performance of all business segments, led by IT and business services and followed by engineering and R&D (ER&D) services.

Margin expansion was a function of better traction in software business profitability, absence of certain one-offs, benefits from project Ascend, and a weak rupee.

Demand conditions remain largely unchanged sequentially; while the BFS sector is seeing healthy momentum, automobiles continue to lag, the management said in an earnings call. The total contract value of new deal wins rose year-on-year and sequentially to $2.6 billion, despite the absence of mega deals. Deal wins were supported by two large deals signed in Q2 that were deferred from Q1.

HCL has been working aggressively to increase the quarterly deal run-rate from $2 billion to $2.5 billion. With a strong pipeline, the management is confident of achieving this consistently.

In this backdrop, HCL raised its FY26 IT services constant currency (CC) revenue growth guidance to 4-5% CC (up from 3-5%), while maintaining the overall company revenue guidance at 3-5% CC.

As per Motilal Oswal Financial Services, robust total contract value (TCV) positions HCL well for H2FY26. The ask rate to achieve the mid-point of revised IT services business revenue guidance now stands at 1% CQGR (compound quarterly growth rate), which is easily achievable.

Ebit margin guidance for FY26 was maintained at 17-18%. However, wage hikes, furloughs, and restructuring expenses, which are expected to continue in Q3, might spill over into Q4. This may keep margin capped nearer to the lower end of guidance. Wage hikes effective from 1 October are expected to impact margins by 70-80 bps in Q3FY26, with around 40-50 bps incremental impact in Q4FY26, the management said.

The AI factor

Interestingly, HCL disclosed for the first time ever its advanced artificial intelligence (AI) revenue, which was over $100 million in Q2FY26, forming 3% of total annualised revenue. Advanced AI includes rapidly evolving AI technologies (Gen AI, Agentic AI, robotics etc.). This excludes classical AI, data and analytics, and services delivered using Gen AI and Agentic AI.

HCL is looking to increase AI investments and is proactively transforming its business model to maintain growth leadership. Last week, rival Tata Consultancy Services Ltd (TCS) also announced a large investment in AI data centres, along with its Q2FY26 results.

“HCL's AI strategy is rooted in an asset-light framework centred on IP creation and service transformation, which will preserve its current capital structure," said ICICI Securities report dated 14 October. This contrasts with TCS, whose announcement of a capex-heavy AI data centre business is a notable shift from its typically asset-light, cash generative model and could dilute its return ratios, added the report.

HCL’s shares are down 21% so far in 2025 versus Nifty IT index’s 18% drop. At FY27 price-to-earnings, the HCL stock trades at multiple of around 21 times, showed Bloomberg data.

“The lower margin profile shall leave HCL with almost zero earnings per share growth in FY26 and an overhang on FY27 earnings growth as well," cautioned a Nuvama Research report on 14 October. While HCL’s relatively better revenue growth and cash flow profile are among the positives, its valuations — a tad higher than TCS and Infosys Ltd — leave no room for disappointment.