HDFC Institutional Equities has significantly revised its outlook on HCL Technologies Ltd, slashing the IT giant's share price target to Rs 1,160 from an earlier Rs 1,465. Concurrently, the brokerage has downgraded HCL Tech's stock rating from 'Buy' to 'ADD', citing concerns over the company's fading growth leadership.
For three consecutive years, HCL Tech had outperformed its Tier-1 peers in organic growth. However, HDFC Institutional Equities believes this premium is unsustainable as growth metrics converge across the industry. The brokerage highlighted that HCL Tech's FY27 guidance of 1-4 per cent constant currency (CC) growth signals limited conviction at the higher end, with the lower end anticipating continued soft discretionary spending and larger-than-planned ramp-downs from two troubled clients.
Reasons Behind the Downgrade
HDFC Institutional Equities pointed to several factors contributing to the downgrade. The FY27 guidance now places HCL Tech within the peer group rather than above it. Additionally, voluntary deal walk-aways and ongoing issues with two key clients introduce downside risks to even the midpoint of the company's guidance. The brokerage expects the June quarter to be weak due to seasonality, the full impact of telecom client spending cuts, and a persistently soft macroeconomic environment.
To reflect these challenges, HDFC Institutional Equities has cut its earnings estimates for FY27 and FY28 by 4-5 per cent. The valuation multiple for HCL Tech has also been reduced to 15 times FY28E EPS, down from 18 times previously, acknowledging the diminishing growth premium over its competitors.
HCL Tech's Strategic Focus
Despite the revised outlook, HCL Tech's management has indicated a strategic deployment of currency depreciation benefits. Instead of flowing directly to margins, these benefits will be invested into sales initiatives and enhancing GenAI capabilities, signaling a focus on future growth areas.
The IT firm continues to demonstrate strong capital return, maintaining a minimum 75 per cent payout policy for another five years. Its free cash flow to PAT conversion stands at an impressive 107 per cent, with a return on invested capital (ROIC) of 40.3 per cent and a net cash position of $3.5 billion, underscoring robust financial health.