HCL Tech sees revenue rebound, but AI deflation remains a concern
HCL Technologies recorded a 2% increase in revenue during the September quarter, following two quarters of decline. The company secured new deals worth $3,258 million, indicating strong demand despite global uncertainties. While there is cautious ...
The 2% revenue growth, at $3,724 million, was driven by deal ramp-ups and contributions from acquired businesses.
ET Intelligence Group: HCL Technologies (HCLTech) reported a sequential improvement in revenue for the September quarter after two consecutive quarters of decline. The 2% revenue growth, at $3,724 million, was driven by deal ramp-ups and contributions from acquired businesses. It also posted strong new deal wins, with a total contract value (TCV) of $3,258 million, the highest since the September 2023 quarter, when it had announced $3,969 million worth of new deals. Its sequential headcount addition of 6,450 was the highest in 16 quarters.
Despite these improving factors, the company has not made any major upward revision to its full-year revenue guidance, only narrowing the band to 2.5-4% growth from the earlier estimate of 1-4% growth in constant currency (CC). The operating margin band, too, has remained unaltered at 17.5-18.5%. This implies the continuation of a cautious approach amid global geopolitical uncertainty and the impact of artificial intelligence (AI) technologies on the top line of the IT services vendor. The stock has remained range-bound over the past three months, reversing the gains made in the initial few weeks during this period amid rising concerns over the AI-related impact and general weakness in the broader market. Without specific management commentary regarding a turnaround, other than the formation of partnerships in the AI ecosystem, the upside for the stock may remain limited.
The management stated during a media conference after declaring the quarterly numbers that the AI-related impact on revenue, termed AI deflation, continued to exist for the company. It would be too early to call for a receding pattern in the effect of AI technologies on Indian IT vendors.
On the other hand, both HCLTech and Tata Consultancy Services (TCS), which declared quarterly numbers last week, have started reporting traction in AI-generated revenue. For TCS, it crossed $3.1 billion, while for HCLTech, it was $876 million on an annualised basis. Additionally, each company stated that AI revenue had a better margin profile than the rest of the business, though specific margins were not mentioned. AI revenue accounts for 10% and 6% of revenue for TCS and HCLTech, respectively.
Both TCS and HCLTech reported sustained traction in new deal wins, stressing the rising importance of AI-related conversations with clients. Over the past few quarters, each company has announced its respective forays to add datacentre capacity.
For investors, the second half of the fiscal year will be crucial, given the seasonal weakness due to holidays and the annual exercise undertaken by clients to decide IT budgets. These factors may affect business momentum, though this may be partly offset by ramp-ups in some of the recently won large projects.
IT Q2 preview: Muted growth, steady margins likely; deal conversion, AI deflation in focus
