HCLTech's AI Revenue Surges 28.4% to $219M as Traditional IT Services Face AI Deflation Pressure

HCLTech's AI Revenue Growth Masks Traditional Services Challenges

HCLTech reported annualised advanced AI revenue of $219 million in the September quarter, marking a 28.4% sequential increase in constant currency from $171 million in the previous quarter3

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. Despite this momentum, the Indian IT services provider's consolidated second-quarter revenue of 356.20 billion rupees ($3.72 billion) marginally missed analyst expectations of 356.86 billion rupees1

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. The company's total AI revenue reached an annualised $876 million, representing approximately 6% of total revenue4

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. Services revenue grew 3% sequentially in constant currency to $3.44 billion, with CEO C Vijayakumar attributing roughly half of the $100 million quarterly gain to advanced AI offerings and the remainder to core services3

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AI Deflation Continues to Disrupt Traditional Billing Models

The rise of artificial intelligence has fundamentally disrupted India's $315 billion IT industry, forcing companies to overhaul their business models as clients increasingly tie fees to performance outcomes instead of hours worked1

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. Management confirmed during a media conference that AI deflation—the negative impact of AI technologies on traditional revenue—continued to affect the company4

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. While AI unlocks newer revenue streams, it simultaneously shrinks traditional revenue as automation reduces the effort needed to complete projects1

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. This AI's disruptive impact on billing models has created a complex financial equation where clients demand a share of efficiency gains, making it challenging for IT services firms to retain the full value created through automation2

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Operating Margin Improvement Driven by AI-Driven Efficiencies

HCLTech achieved an operating margin of 18.2%, up 80 basis points from the previous quarter1

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. CFO Shiv Walia attributed 73 basis points of the 131 basis point EBIT margin expansion to Project Ascend, which includes AI-driven efficiencies, and 32 basis points to higher margins on advanced AI services3

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. Vijayakumar revealed that advanced AI services earn margins at least 7-10 percentage points above traditional services, with platform and intellectual property components achieving gross margins above 70%3

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. Operating leverage in sales and general costs contributed an additional 50 basis points to margin improvement3

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New Deal Wins Signal Strong Demand Despite Cautious Tech Spending

HCLTech secured new deal wins worth $3.26 billion in the quarter, up from $2.4 billion in the preceding quarter and $2.57 billion in the same period last year1

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. This represents the highest total contract value since the September 2023 quarter, when the company announced $3,969 million worth of new deals4

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. The current quarter's figure includes a significant $1.14 billion Mercedes-Benz contract1

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. However, Vijayakumar indicated this contract will contribute no revenue in the next two quarters and will only start generating revenue in the first quarter of the next fiscal year3

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. The company also added 6,450 employees to its headcount, the highest net addition in 16 quarters, signaling expectations of continued demand3

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Annual Revenue Forecast Narrowed Amid Acquisition Contributions

HCLTech narrowed its annual revenue growth forecast to 2.5-4% from the previous range of 1-4%, though most brokerages had expected the company to retain the original forecast1

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. The midpoint moved from 2.5% to 3.25%, a gain of 75 basis points3

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. CFO Walia explained that the guidance now includes inorganic contribution of 62 basis points for services and 87 basis points for the company, with the midpoint of organic guidance remaining broadly unchanged3

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. The HPE Telco Solutions acquisition, consolidated for two months in Q2, contributed approximately $21 million in revenue3

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. Vijayakumar emphasized the company does not want to raise guidance in "a volatile world" where things can change rapidly3

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Strategic Partnership with Anthropic Signals AI Agent Focus

Ahead of earnings, HCLTech announced a partnership with Anthropic, stating it will establish a dedicated AI agent business unit to build AI agents and accelerate Claude adoption1

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. The company highlighted key advanced AI deals, including building AI operating models and an AI factory for American power and healthcare providers, and deploying agentic solutions to European financial services firms and a manufacturing company3

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. CEO Vijayakumar asserted the company is "able to offset AI-driven deflation by gaining market share in our core services and through our advanced AI offerings"3

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Broader Industry Context and Competitive Landscape

The cautious tech spending environment extends across Indian IT services providers. Larger rival Tata Consultancy Services reported revenue in line with estimates, with AI revenue crossing $3.1 billion—representing 10% of total revenue—and the acceleration in AI revenue lifted TCS stock by as much as 6.2%1

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. Tech Mahindra, which plans to disclose AI revenue separately in H2 FY27, achieved an EBIT margin of 14.8% in Q2 FY27 after 12 consecutive quarters of margin improvement2

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. The company is testing outcome-based commercial models that price work performed by human employees and AI agents together, with adoption increasing significantly from pilots conducted a couple of quarters back2

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. HCLTech shares closed flat on Monday, with the Nifty IT stock index closing 1.1% down1

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. The second half of the fiscal year will prove crucial given seasonal weakness due to holidays and annual client IT budget decisions4

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