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HCL Technologies' Profit Rises Amid Sector Challenges: A Resilient Quarter with Clouds Ahead

Marcus LeeWednesday, Apr 23, 2025 1:08 am ET

3min read

HCL Technologies, one of India’s leading IT services firms, reported a 8.05% year-on-year rise in consolidated net profit for the fourth quarter of fiscal 2024-2025 (Q4 FY2025), to ₹4,307 crore. While the top line grew 6.13% YoY to ₹30,246 crore, margin pressures and macroeconomic headwinds underscored the challenges facing the sector. The results highlight HCL’s resilience in key areas like digital services and AI-driven solutions, but also reveal vulnerabilities tied to global trade policies and talent retention.

Revenue Growth: A Mixed Picture

HCL’s Q4 revenue rose modestly in constant currency terms (4.7% YoY for FY2025 overall), but the sequential decline (0.8% QoQ) reflected seasonal weakness in its products business and the completion of large projects in retail and consumer packaged goods (CPG). The services segment, which now accounts for 59.3% of total revenue, grew 2.7% YoY, driven by digital services (up 12.6% YoY), which now contribute 40.7% of services revenue. This outperformance in digital—bolstered by AI and integrated go-to-market (GTM) strategies—contrasts with the struggling Products & Platforms (P&P) division, which fell 15% QoQ due to seasonal demand and delayed discretionary deals.

The reflects investor caution: shares have declined about 12% year-to-date, underperforming peers like Infosys and Tata Consultancy Services (TCS), which have seen smaller declines.

Margin Pressures: The Cost of Growth

Profitability took a hit in Q4, with EBIT margins contracting to 18.0% from 19.5% QoQ. The decline stemmed from wage hikes (senior management and visa costs), lower software sales, and P&P seasonality. While margins improved slightly YoY (from 17.6% in Q4 FY2024), the sequential drop underscores execution challenges. Brokers estimate P&P’s margin drag at 110–170 basis points QoQ, while attrition (now 13% LTM, up from 12.4% YoY) adds to cost pressures.

Strategic Wins and Risks

HCL’s Q4 saw notable client wins, including a $2.995 billion TCV (total contract value) in the quarter, bringing FY2025 TCV to $9.268 billion. Key partnerships, such as with Western Union and a Fortune 50 telecom firm, highlight its ability to secure large deals. However, macro risks loom large:
- US Policy Uncertainty: New tariffs and geopolitical tensions are delaying manufacturing and retail sector IT spending.
- Discretionary Spending: Clients are cutting back on non-essential IT projects, affecting ER&D and P&P divisions.
- Inorganic Growth Limits: While the HPE CTE acquisition added ~$40 million in Q4 revenue, it couldn’t offset headwinds from the Verizon contract ramp-down and tariff impacts.

FY2026 Outlook: Caution Ahead

Management forecasts 2–5% constant currency revenue growth for FY2026, with EBIT margins targeting 18–19%. This cautious guidance reflects the uncertain macro backdrop. Broker downgrades—ICICI Securities trimmed FY2025 earnings forecasts by 0–8%, while Nomura warned against IT sector exposure—suggest investors are pricing in further slowdowns.

The shows HCL’s 4.7% growth lagging peers like Infosys (7.3% YoY) and TCS (5.5% YoY), though its margin resilience (EBIT margin improved YoY) offers some solace.

Dividend and Capital Allocation

HCL’s dividend yield remains attractive, with a total FY2025 payout of ₹60 per share (including a ₹6 special dividend), yielding ~2.3% at current prices. However, headcount reductions (down 4,061 YoY) and cautious hiring (1,805 freshers vs. 3,096 YoY) signal a focus on cost discipline.

Conclusion: A Firm Footing, but Storm Clouds

HCL’s Q4 results reflect a company navigating choppy waters with relative steadiness. Its digital services and AI-driven offerings—responsible for $3 billion in Q4 bookings—are clear growth engines, and its adherence to FY2025 guidance (despite macro headwinds) speaks to operational discipline. Yet the risks are material: a 13% attrition rate, US policy uncertainty, and softening discretionary spending could test margins further.

Investors must weigh HCL’s resilience in high-growth segments against its exposure to global trade dynamics. While the stock’s valuation—currently trading at 14.5x FY2026E EPS, below its 5-year average—offers some comfort, the path to sustainable margin expansion remains unproven. For now, HCL’s story is one of cautious optimism: a quarter of resilience, but with storms still on the horizon.

Data as of HCL Technologies’ Q4 FY2025 earnings release and brokerage reports.

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