HCL Technologies has received a downgrade from Dolat Capital, which revised its rating to 'Reduce' despite the IT services company delivering a strong third-quarter performance that surpassed market expectations.

Brokerage Rationale Behind Downgrade

Dolat Capital's decision to downgrade HCLTech stems from concerns about limited near-term upside potential in the stock. The brokerage firm highlighted that the recent sharp run-up in share price has significantly capped further appreciation prospects, making the current valuation levels less attractive for new investments.

Company's Strong Operational Performance

Despite the downgrade, Dolat Capital acknowledged several positive aspects of HCLTech's business performance:

• Deal Conversions: The company has demonstrated accelerating deal conversion rates
• Margin Resilience: HCLTech has maintained resilient margins during the quarter
• Q3 Beat: The company exceeded market expectations in its third-quarter results
• Strong Fundamentals: Overall business fundamentals remain robust

Market Dynamics and Valuation Concerns

The downgrade reflects broader market dynamics where strong operational performance has already been factored into the stock price. Dolat Capital's analysis suggests that while HCLTech continues to execute well operationally, the investment opportunity has become less compelling due to valuation constraints.

The brokerage's 'Reduce' rating indicates their view that the stock's recent gains have outpaced the underlying business growth, creating a situation where risk-adjusted returns may be limited in the near term despite the company's solid execution and market position.

HCL Technologies shares declined over 1.6% to ₹1,639.90 following the company's third-quarter results, which showed a sequential decline in net profit due to one-time impacts from new labour code implementation. The IT services major reported mixed results with strong revenue growth offset by profit pressures from regulatory changes.

Financial Performance Overview

The company's consolidated financial performance for the October-December period reflected both operational strength and regulatory headwinds:

The revenue growth of 6% quarter-on-quarter exceeded analyst estimates, while the net profit decline was primarily attributed to one-time regulatory impacts rather than operational weakness.

New Labour Codes Impact

The implementation of New Labour Codes created a significant one-time financial impact during the quarter. The regulatory changes led to an increase in employee benefit provisions estimated at ₹956 crore, directly affecting the company's bottom line. Additionally, the operating margin included an 81 basis points impact from restructuring costs, further pressuring profitability metrics.

Business Segment Performance

HCL Technologies demonstrated strong performance across key business segments, with notable growth in emerging technology areas:

The advanced artificial intelligence segment emerged as a key growth driver, reaching $146 million in constant currency terms with nearly 20% quarter-on-quarter growth, highlighting the company's success in high-value technology services.

Order Book and Market Position

The company's order book performance demonstrated strong market demand and business momentum:

• Total order book: $3 billion in Q3
• Sequential growth: 17% quarter-on-quarter
• Annual growth: 43% year-on-year

This substantial order book expansion indicates robust client demand and positions the company well for future revenue growth across its service portfolio.

Revised Guidance and Outlook

HCL Technologies updated its full-year guidance, reflecting increased confidence in business performance:

The company narrowed its revenue growth guidance to a tighter range while upgrading the services revenue outlook, indicating management's confidence in business trajectory. The EBIT margin guidance remains unchanged at 17%-18%, excluding the one-time impact of new labour codes.