HCL Tech shares tumble 3%. Buy the dip or sell? Jefferies says buy with Rs 1,850 target price

Economic Times

2 days ago

Shares of IT major HCL Technologies plunged over 3% to Rs 1,568.75 on BSE Tuesday, with investors spooked by a brutal 170 basis points quarter-on-quarter margin compression and management's decision to slash FY26 margin guidance by 100 basis points to 17-18%.
ADVERTISEMENT Yet amid the carnage, global brokerage Jefferies stepped up with a contrarian upgrade to buy, setting a target price of Rs 1,850 as the firm raised its FY26 growth guidance to 3-5%, a move that could position HCL Tech as the fastest-growing company among India's top IT players.
"We expect HCL Tech to deliver 10% EPS CAGR over FY26-28 -- the highest among Top-5 Indian IT firms. Superior growth outlook, similar FCF conversion and higher payouts should support valuation premium vs. TCS/Infosys," Jefferies said, cutting FY26/28 EPS estimates by up to 2%.
The margin bloodbath was driven by a perfect storm of headwinds: a slower ramp-up of a large deal, which dragged utilization down by 80 basis points; a one-off client bankruptcy that shaved 30 basis points off margins; and aggressive investments in AI capabilities and sales and marketing, adding another 30 basis points of pressure.But Jefferies sees light at the end of the tunnel. Despite net new deal wins falling 8% year-on-year to $1.8 billion—due to procedural delays in closing two large deals—the brokerage expects these to close soon. More crucially, HCL Tech has consolidated its wallet share in a large financial services client, which should boost revenues, even though it is not reflected in Total Contract Value (TCV) due to its time-and-materials structure.
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ADVERTISEMENT 'Given high revenue visibility, HCLT has raised the lower end of its revenue growth guidance by ~100 bps to 3–5% YoY in constant currency. This implies a 0.7–2% CAGR over the rest of FY26, which looks achievable,' Jefferies noted, raising its revenue estimates by 2–3% on the back of favorable forex movements and a Q1 services beat.The brokerage expects HCL Tech to deliver a 5.8% year-on-year constant currency CAGR over FY26–28, with margins reverting to the 18–18.4% range by FY27/28, as management's focus on investments—'even at the cost of near-term margins'—is expected to support superior long-term growth prospects.
ADVERTISEMENT Motilal Oswal joined the bullish chorus with a 'Buy' call and a target price of Rs 2,000, stating that 'HCLT is on track to be the fastest-growing company among the top four.'The domestic brokerage expects HCL Tech to clock a USD revenue CAGR of 7.0% and an INR PAT CAGR of 8.8% over FY25–27E, calling it 'the fastest-growing large-cap IT services company' with an attractive 'all-weather portfolio.'
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ADVERTISEMENT Nomura also retained its buy call with a Rs 1,810 target, though it lowered FY26-27F EPS by 2-5% and reduced the target price from Rs 1,840 earlier."We expect the Street to ignore near-term margin miss (as it is likely to reverse in FY27F) and focus on continued revenue outperformance. HCLT trades at 22.4x FY27F EPS," Nomura said.
The contrarian bets by top brokerages signal confidence that HCL Tech's growth trajectory remains intact despite the margin turbulence, with the stock's valuation potentially attractive at current levels for investors willing to look beyond near-term headwinds.
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