TCS flags no let-up in client caution after tepid Q1

Bengaluru: Tata Consultancy Services Ltd (TCS) rang in the information technology (IT) industry’s earnings season with a report card that barely moved from the preceding quarter.

Muted growth, weaker profitability, a shrinking order book, and an unchanged warning on client spending from India’s biggest IT services company reinforced concerns that the country's $300-billion IT services industry is headed for another lacklustre year.

The Mumbai-based company reported first-quarter consolidated revenue of $7.62 billion, up 0.04% sequentially and 2.7% on a yearly basis. Analysts had predicted even lower numbers—$7.52 billion by at least 34 analysts polled by Bloomberg.

TCS reported a consolidated revenue of $7.62 billion, up 0.04% sequentially and 2.7% year-on-year. The net profit was $1.46 billion, a decline of 1.3% on a quarterly basis and 2.2% year-on-year.

TCS's muted growth, weaker profitability, and a shrinking order book raise concerns that the $300-billion IT services industry may face another lackluster year amid client caution in spending.

TCS's annualized AI revenue reached $2.6 billion, contributing to better-than-expected overall revenue, particularly in the BFSI sector, despite declines in other areas like retail.

TCS's management expects demand to pick up in Q2, citing a backlog of technology projects from clients, although the current macroeconomic environment remains uncertain.

Yes, TCS's shares have fallen 36% since the start of the year, which reflects broader challenges in the IT sector and may signal investor apprehension about future growth prospects.

Most of the increase came from financial institutions, which offset losses in business from retail firms. The company gets a third of its revenue from banks.

Consolidated net profit declined 1.3% on a quarterly basis and 2.2% year-on-year to $1.46 billion. And profitability slumped 130 basis points on the back of a rise in wage costs. The company also announced a dividend of ₹12 per share.

At a post-earnings conference call on Thursday after the results were announced, the company’s management said the demand commentary was unchanged from what it had outlined in March.

“I don’t know when this (macroeconomic environment) will change because overall many of the ongoing conflicts are continuing, and we also saw many situations of our clients wanting to defer some of the projects during the quarter,” TCS chief executive K. Krithivasan said during the call.

TCS’s larger peer, Accenture Plc, had likewise said client budgets were not increasing and they had deferred projects. During the company’s post-earnings press conference on 18 June, chief executive Julie Sweet had said clients were spending differently with artificial intelligence (AI), but budgets have not increased.

As the first large Indian IT company to report quarterly results, TCS’s earnings set the tone for the sector. Its subdued performance is unlikely to reassure investors ahead of results from Infosys, HCLTech and Wipro, as clients continue to defer discretionary technology spending amid geopolitical uncertainty, even as advances in AI and automation tools reshape traditional software development and maintenance work.

However, despite the grim backdrop, TCS remained optimistic, with Krithivasan saying that he expects demand to pick up sometime in Q2 “primarily because our customers have a significant amount of pent-up technology backlog to be completed”.