HCLTech Ltd.'s artificial intelligence opportunity has yet to translate into revenue at a level comparable with its peers, Citi said after a meeting with the company's management. The brokerage retained its Sell rating on the stock and set a target price of Rs 1,110.
Citi said HCLTech's AI services, engineering and business process outsourcing businesses could create new opportunities, but noted that the company's advanced AI revenue was "not comparable with other IT services companies."
The brokerage expects HCLTech to deliver about 5% earnings per share growth through FY29, which limits the scope for stronger earnings growth despite the company's focus on AI, data centres and other new areas.
Citi's view follows its meeting with HCLTech CEO and Managing Director C Vijayakumar and Chief Financial Officer Ajay Mohan. The brokerage said management highlighted new opportunities from AI and advanced AI-led services, while also discussing investments in data centres and engineering capabilities.
AI Revenue Remains Key Gap
HCLTech said its IT services, engineering and business process outsourcing capabilities are creating new opportunities. The company pointed to areas including agentic AI and physical AI-led initiatives, according to Citi.
However, Citi said HCLTech's advanced AI revenue remains difficult to compare with that of other IT services companies.
The brokerage also said the company's existing business could benefit from the adoption of AI, particularly through legacy modernisation and wider use of agentic AI in enterprises.
Citi said HCLTech's software business had also been sluggish over the past four quarters. It expects a recovery, with software revenue projected to grow at a 3%-4% annual rate and EPS CAGR at about 5% through FY29.
Data Centre Investment To Rise
HCLTech plans to invest about Rs 35 billion to set up a new data centre facility in India, Citi said.
The brokerage noted that data centres have traditionally been a business that HCLTech has not focused on because it has been more commoditised and asset-intensive. It said the company now sees data centres as a potential growth opportunity as demand rises from AI and other applications.
Citi said HCLTech expects the new facility to serve large domestic customers as well as global clients. The brokerage also noted that US start-ups may lack the capacity to train AI models and could outsource that work to HCLTech.
Area To Watch
Citi said HCLTech's engineering and software businesses remain areas where the company sees potential for growth.
The brokerage noted that the acquisition of ASAP had not worked as expected. It said the acquisition had been made to strengthen HCLTech's engineering capabilities, particularly in the automotive sector.
Citi said overall artificial intelligence demand remained weak at present, although it expects demand to improve over the next quarter.
Limited M&A Appetite
HCLTech is unlikely to pursue significant acquisitions in Europe, Citi said, citing execution risks.
The brokerage also said the company would not pursue acquisitions simply to increase its scale. HCLTech's management indicated that acquisitions would need to have a clear strategic rationale.
Citi also said competitive intensity remained high across the IT services sector. It noted that HCLTech continues to face competition for talent and deals, although the company believes it can differentiate itself in some areas.
Costs And Margins
Citi said HCLTech expects revenue per employee to increase by about 3%, which should support margins. However, wage inflation and investment requirements could offset some of that benefit.
The brokerage said HCLTech remained committed to its earlier commitment to pay at least 75% of profit as dividends.
Citi retained its Sell rating and set a target price of Rs 1,110, based on 15 times estimated March 2028 earnings per share. It said the multiple was below the company's five-year average of about 21 times because of HCLTech's weaker growth outlook.
The brokerage said HCLTech continues to trade at a premium to large-cap peers despite its lower expected growth. It identified risks to its investment view if the shares outperform its price target, including improved demand, stronger deal bookings, higher utilisation, better margins and a faster-than-expected recovery in the US market.
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