HCL Technologies just delivered a quarter that tells two stories at once.
On the other, traditional IT services are feeling the pressure from client cutbacks and AI-driven deflation. The company narrowed its FY27 revenue growth guidance to 2.5–4% in constant currency, up from 1–4% earlier, while keeping margins steady at 17.5–18.5%. The question isn't whether AI is growing—it's whether that growth can offset softness elsewhere and justify the heavy investments HCLTech is making. Investor Presentation
The $219 million in Advanced AI revenue didn't appear out of thin air. HCLTech's management points to strong client demand for its AI offerings and strategic partnerships across the AI stack. Two deals stand out: a U.S.-based AI-native company chose HCLTech as a strategic partner for an AI Factory spanning networking, cybersecurity, and high-performance computing infrastructure, while a U.S. power technology company signed on for an agentic AI-powered digital thread connecting engineering, manufacturing, and supply chain operations. Investor Presentation +3
These wins aren't isolated.
Yet Advanced AI still represents only about 5.9% of total revenue (my calculation from $219 million against $3,724 million total revenue). That's up from roughly 4.7% in the previous quarter, but it's small enough that the company needs broader strength to hit its growth targets. Investor Presentation +1
Here's where things get interesting. A $1.14 billion contract signed in early July, with an initial five-year term, is entirely net new business. Media reports have linked this to Mercedes-Benz, though the official filing doesn't name the client. The deal sounds massive on paper—averaging about $228 million annually—but its near-term impact is minimal.
This timing mismatch matters. The deal adds to HCLTech's pipeline and visibility, but it won't significantly boost this year's numbers. It also raises questions about margins. Large, transition-heavy deals can dilute margins early on, though management insists its risk framework ensures it won't compromise on profitability. The company's EBIT margin guidance of 17.5–18.5% already accounts for restructuring costs, so there's little room for missteps. Transcript
Speaking of margins, HCLTech's 131 basis points sequential expansion to 18.2% in Q2 is impressive. Even after stripping out 84 basis points of restructuring costs (up from 62 bps in Q1), underlying margins rose to roughly 19%. The gains came primarily from IT & Business Services (up 160 bps to 18.6%) and HCLSoftware (up 247 bps to 20.1%), while Engineering & R&D Services actually saw margins dip 43 bps to 15.2%. Investor Presentation +2
What drove this expansion? The Q2 earnings call transcript isn't available yet, so management's specific commentary on pricing, utilization, or automation is missing. However, we know headcount grew by 6,450 in the quarter, with 6,136 freshers added. A more junior pyramid typically lowers per-employee costs, which could support margins. But the company is also investing heavily—up to INR 3,500 crore in AI data centers, a $150 million stake in Sarvam AI, and the Jaspersoft acquisition. Sustaining 17.5–18.5% margins will require these investments to pay off faster than they burn cash. Investor Presentation +3
Just before announcing results, HCLTech unveiled a Global Premier Partnership with Anthropic to scale "governed Agentic AI" across enterprises. The company will establish a dedicated Anthropic Business Unit and Center of Excellence, integrate Claude and Claude Code into its AI Force platform, and embed Claude into products like HCL BigFix and HCL AppScan.
This sounds significant, but HCLTech isn't alone. TCS has partnered with Anthropic to bring Claude to 50,000 employees and regulated industries. Infosys is integrating Claude with its Topaz framework, focusing on telecom and financial services. Wipro has launched an Applied AI Center of Excellence for Claude, aiming to certify 10,000 experts. HCLTech's potential differentiator lies in its product-plus-services model—embedding Claude directly into its software—but this advantage is unproven. No financial terms or revenue targets were disclosed, so the near-term impact is likely gradual.
Here's the core tension.
Engineering & R&D Services fell 3.7% quarter-on-quarter in Q1 due to sharp discretionary spending cuts at two large U.S. telecom clients, and management expected this pressure to continue. Healthcare revenue has also declined gradually over eight to nine quarters from a run rate near $500 million. Transcript +2
Advanced AI is growing fast enough to add roughly $48 million sequentially in Q2 (my calculation), but that's against a total revenue base of $3.7 billion. It's not yet large enough to fully offset deflation in the other 94% of the business. The narrowed guidance to 2.5–4% suggests confidence, but the upper end depends on H2 organic growth at a time when large deal ramps are slow and traditional services face headwinds.
The $3.26 billion in Q2 bookings is strong, up 27% year-on-year. But the mix matters. If you strip out the $1.14 billion mega deal (which likely sits in Q2 based on timing), the remaining bookings of roughly $2.1 billion are actually below Q1's $2.4 billion and last year's $2.6 billion. The deal wins include AI-driven digital workplace transformations, SAP managed services, and network modernization, but the presentation doesn't break down renewals versus new business or vertical mix. Investor Presentation +2
Record first-half bookings provide medium-term visibility, but FY27 revenue recognition depends on ramp-up timing. The mega deal's negligible FY27 impact, combined with slow ramps in other large contracts, means the bookings strength feeds FY28 more than FY27. Risks include further telecom client cuts, AI-driven pricing pressure on renewals, and macro uncertainty that management described as unchanged since March. Transcript +1
Despite these investments, HCLTech hasn't forgotten shareholders. The company declared an interim dividend of ₹12 per share for Q2, maintaining a pattern of regular payouts.
The current dividend yield is around 4.45%. Investor Presentation +1
Free cash flow remains robust at ₹4,128 crore ($432 million) in Q2, with FCF at 87% of net income on a trailing twelve-month basis. Net cash stood at ₹24,503 crore ($2,556 million) as of September 30, 2026, down from ₹33,288 crore in March due to dividend payments and acquisition outflows. The ₹3,500 crore AI data center investment represents about 14% of current net cash, which management says won't come at the expense of the payout policy. Investor Presentation +3
HCLTech is clearly in the midst of an AI-led transition. Advanced AI is growing faster than the overall business, margins are expanding despite heavy investment, and the company is building partnerships and capabilities for the long term. But the traditional IT services engine isn't firing on all cylinders, and the near-term revenue contribution from mega deals is limited.
The narrowed guidance to 2.5–4% reflects cautious optimism. Hitting the upper end will require H2 to deliver stronger organic growth, faster deal ramps, and continued AI momentum. Sustaining margins at 17.5–18.5% will demand that investments in data centers, talent, and partnerships translate into productivity gains and higher-margin work faster than they dilute profitability.
For investors, the story is no longer about whether HCLTech is embracing AI—it's about how quickly that embrace translates into sustainable growth and margin expansion. The $219 million in Advanced AI revenue is a promising start, but it's just that—a start. The real test lies ahead.
