HCLTech Ltd.'s efforts to improve revenue per employee may support margins, but wage inflation and higher investment could limit the benefit, according to Citi.
The brokerage said HCLTech expects revenue per employee to increase by about 3%, which should help improve margins. However, Citi said the gains could be partly offset by higher employee costs and investments required to support the company's growth plans.
The comments followed Citi's meeting with HCLTech CEO and Managing Director C Vijayakumar and CFO Ajay Mohan.
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Citi said the company expects productivity gains to contribute to margin improvement as revenue generated per employee rises. However, it also flagged wage inflation as a factor that could put pressure on profitability.
Productivity Gains Face Cost Pressures
HCLTech's expected increase in revenue per employee comes as the company continues to focus on improving productivity and expanding its higher-value services.
Citi said the company expects revenue per employee to increase by about 3%. The brokerage noted that this could provide some support to margins, but said wage inflation could absorb part of the benefit.
Investment spending could also weigh on margins, Citi said.
The company continues to invest in areas including artificial intelligence, engineering and data centres. HCLTech also sees opportunities from legacy modernisation and the wider adoption of agentic AI in enterprises.
Citi said HCLTech plans to invest about Rs 35 billion in a new data centre facility in India. The brokerage said data centres had traditionally not been a major focus for the company because the business is more commoditised and asset-intensive.
HCLTech now sees an opportunity in the segment as demand increases from AI and other applications, Citi said.
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Growth Remains Modest
Citi expects HCLTech's software business to recover after being sluggish over the past four quarters. It forecasts software revenue growth of 3%-4% and expects earnings per share to grow at about 5% annually through FY29.
The brokerage retained its Sell rating on HCLTech and a target price of Rs 1,110.
Citi said HCLTech continues to trade at a premium to large-cap peers despite its lower expected growth. It expects the increase in revenue per employee to provide some margin support, but said wage inflation and investment requirements could limit the overall benefit.
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