HCLTech starts the year strong, but margins raise worry

Mint

6 hours ago

HCL Technologies Ltd reported better-than-expected revenue in the June quarter and now sees full-year growth at 3-5% against 2-5% earlier, but the management lowering its full-year profitability by 100 basis points was a sore spot.
On Monday, the country's third-largest information technology (IT) services company reported $3.55 billion revenue for the June quarter, up 1.34% sequentially. The performance exceeded expectations of 37 analysts polled by Bloomberg, who expected HCLTech to report $3.53 billion in revenue. This was its best first quarter in six years.
HCLTech performed better than larger peer Tata Consultancy Services (TCS) in a lumpy first quarter because of its Europe business, and expects a stable FY26 despite lingering macroeconomic uncertainty. TCS ended the first quarter with $7.42 billion in revenue, down 0.59% sequentially.
The Noida-headquartered company's management sounded confident.
'We observed that the environment remains stable from an overall perspective, with some variations across specific verticals. It also did not deteriorate as feared at the start of the quarter,' said C Vijayakumar, chief executive of HCLTech, as part of his prepared remarks during the company's post-earnings press conference on Monday.
Vijayakumar's commentary is in contrast to TCS chief executive K. Krithivasan, who called out delays in decision-making and project starts with respect to discretionary investments.
The HCLTech management narrowed its revenue guidance for the full year. The company now expects revenue growth between 3% and 5% in constant currency terms, higher than its 2% guidance on the lower end it had called out in April. Constant currency does not take currency fluctuations into account.
While TCS's Krithivasan said that non-essential tech spending, which is crucial in boosting revenue of homegrown IT outsourcers, must be back once uncertainty lifts, Vijayakumar was optimistic of growth along expected lines.
'We are optimistic about meeting a revised guidance supported by our superior revenue growth and positive booking expectations for the upcoming quarters,' said Vijayakumar.
For now, most of the company's incremental business of $47 million came from businesses based in Europe, which contributed 87% of it. HCL gets almost a third of its business from Europe.
In terms of verticals, much of the incremental revenue came from banks and financial institutions, which makes up a little more than a fifth of the company's business and is its largest cash cow. HCLTech got $766 million from financial institutions last quarter.
However, there were bigger causes of concern. The Noida-based IT outsourcer reported $450 million in net profit, down 9.3% sequentially. This was the company's second successive quarter of net profit decline.
HCLTech's operating margins also raised concerns. Its profitability declined 160 basis points to 16.9% during the quarter. One basis point is a hundredth of a percentage point. The company even reduced its operating margin band to 17-18% for the full year as against its 18-19% target in April.
Chief financial officer Shiv Walia called it one-time impact, attributing the drop to a bunch of factors, adding 'specialized hiring as well as skill and location mismatch and a one-off impact of customer bankruptcy' caused the margins to drop, among other smaller factors.
While the software products business is historically its primary margin booster, operating margins for this vertical declined 190 basis points sequentially to end at 22.4% for the June quarter.
Notably, HCLTech is one of the few large IT outsourcers that has a sizeable reliance on selling and licensing revenue of software products. Its revenue from its software business fell 4.6% on a quarterly basis to $330 million; still, the bigger impact of this arm is on the company's operating margins.
Unlike TCS, HCLTech reduced headcount in the quarter. The company cut staff by 269 in the April-June 2025 period to end with 223,151, whereas TCS added 5,090 people in the first three months of the fiscal to end with 613,069 employees.
Two of the country's three largest IT outsourcers adding headcount implies better signs ahead. More headcount in an IT services company means more demand for IT services and vice-versa.
This increase in headcount comes on the backdrop of a tariff war started by US president Donald Trump coupled with geopolitical uncertainties. Both have put IT spends of large companies, many of whom count HCLTech as their IT vendor, in limbo.
The company also highlighted a restructuring plan that was put in place.
'The restructuring consists of two components. One is a lot of facilities that we are not utilizing, mostly in locations outside India, is something which we believe we should optimize, because we have not been using some of these facilities, especially some of it related to our acquisitions,' said Vijayakumar.
He also mentioned that the headcount would be cut because of the programme, in order to get to the company's 18-19% operating margin aspiration.
'The second is also that there will be some talent ramp-down that has happened, especially in some of the geographies outside India,' said Vijayakumar, adding that the upper end of its guidance factored a cost component to its restructuring programme.
Like TCS, HCLTech did not call out orders or revenue from Gen AI, but announced a dividend of ₹ 12 per share.
The company's shares fell 1.41% to close at ₹ 1,614 on Monday. The 30-share benchmark BSE Sensex index closed 0.3% lower at 82,253.46 points. The earnings were announced after market hours.