HCL Tech has no room for error

HCL Technologies Ltd's sequential margin contraction in the June quarter (Q1FY26) comes as a rude shock, even though the first quarter of a financial year is typically weak for the company owing to seasonality in its software business.

- Harsha Jethmalani

Earnings before interest and tax (Ebit) margin fell 170 basis points (bps) to 16.3%, missing the consensus estimate of 17.3%.

Higher sales and marketing investments, lower utilization, client bankruptcy shrunk Q1 margin. The upshot is that HCL trimmed its FY26 Ebit margin guidance by 100 bps from 18-19% to 17-18%. As a result, investors dragged the stock down about 3% on Tuesday.

"One potential conclusion that the Street may draw is that HCL is trading off margins for revenue growth. This perception is reinforced by the downward revision of its Ebit margin guidance band—from 19-20% in FY22 to 17-18% for FY26, marking the second cut in four years," said a Kotak Institutional Equities report of 14 July. Margin narrowed partly due to industry-wide pressure and may not return unless demand returns to normalcy or the Indian rupee depreciates significantly, Kotak cautioned.