With one mega hit on home ground, TCS kicks off first quarter on the front foot

  • At least half of TCS’s sequential revenue growth came from India thanks to a $1.83-billion deal from state-run telecom operator BSNL.
  • TCS insists its strong first-quarter growth was not a “one-trick pony”, but held back from calling out sustained growth cautioning that the market remained volatile.

Jas Bardia, Shouvik Das
Updated11 Jul 2024, 09:07 PM IST
TCS chief executive K. Krithivasan said the IT services company was starting to see longer-term generative AI deals. (Reuters)
TCS chief executive K. Krithivasan said the IT services company was starting to see longer-term generative AI deals. (Reuters)

Tata Consultancy Services Ltd kick-started the first quarterly earnings season of 2024-25 on a buoyant note, growing faster than its average pace in the previous five financial years.

Growth in the April-June period, however, was considerably driven by a one-off deal in its home turf—an unconventional growth geography—leading to questions on whether the quarterly figures are an accurate representation of organic growth for India’s biggest IT services outsourcer.

At least half of TCS’s $142 million sequential revenue growth came from India. This is unusual. Until the June quarter of last year, over 85% of TCS’ revenue came from the Americas, Europe and the UK, while India contributed less than 5%.

This quarter, a $1.83-billion 4G network deployment deal won in May last year from state-run telecom operator, Bharat Sanchar Nigam Ltd (BSNL), bolstered TCS’ India business to 7.5% of its quarterly revenue, even as the contribution of its key geographies declined by 2.4 percentage points.

TCS's India business earned $563 million in quarterly revenue, up 62% year-on-year in constant currency terms. Constant currency does not take currency fluctuations into account.

Also read | Let the good times roll: IT services eye a better future

“We are very happy to announce a good start to the new financial year, supported by all round growth across markets and industry verticals,” said K. Krithivasan, who took over as chief executive officer of TCS in June last year, even as he maintained maintained caution on uncertainties in its largest geographies, including US, Europe, and the UK.

Krithivasan offered a tempered outlook for the year ahead on account of this macroeconomic uncertainty, although he affirmed that this financial year would be better than the previous. TCS does not give guidance figures.

“There is strong growth outside of our BSNL business, relative to what we have seen in previous quarters. It's not a one-trick pony,” Krithivasan said. 

“But at the same time, the reason why we are hesitant to call out sustained growth is that we still find market conditions to be quite volatile. Customers do take decisions at a very short notice based on what they perceive of the market conditions and other sentiments.”

Quarterly revenue for TCS grew 1.9% over the March quarter to $7.5 billion. Excluding the June quarter of FY21—which was impacted by worldwide lockdowns as a consequence of covid-19—TCS grew at an average of 1.6% sequentially in each of the past five June quarters.

TCS also surpassed a Bloomberg poll of 28 analysts that projected revenue of $7.44 billion this quarter.

Despite faring better than expected, Krithivasan maintained prevalent macroeconomic conditions as the key factor behind the uncertain demand environment for technology services and projects.

Generative artificial intelligence, on this note, still remains a bit-part contributor at best—with the TCS chief stating that the company’s generative AI pipeline was now at $1.5 billion in annual revenue run-rate.

Dark clouds and silver linings

Signs of weakness, however, were aplenty through TCS’ quarterly results. The company clocked its slowest year-on-year revenue growth in the five years barring the pandemic-hit June quarter of 2020-21.

While analysts found the company’s overall quarterly financial performance resilient, they also underlined the signs of caution.

“TCS does have multiple growth drivers across a broader base, beyond BSNL, for its overall revenue growth. Taking the overall market environment into account, TCS’ overall Q1FY25 performance has been decent,” said Chirajeet Sengupta, managing partner at industrial research firm Everest Group.

“The encouraging bit is that there are no immediate indicators of the overall market demand falling further, and the weakness in the major markets for the industry is likely close to bottoming out,” he added. “This should help the overall revenue growth for the entire industry, going forward.”

Sengupta, however, exercised caution in terms of how TCS is shaping up for the rest of the year.

“A recovery in market sentiment and discretionary deals will not be sharp. The uncertainties added on by the UK election results, as well as the upcoming US elections, will further affect market recovery,” Sengupta added.

“But clients are unlikely to put off tech spends indefinitely, so there will be some bounce-back through this fiscal. It’s not necessary that FY25 will be a year of considerably stronger growth than the previous fiscal.”

Omkar Tanksale, senior research analyst for IT at brokerage firm Axis Securities, expects an uptick for both TCS and the sector going forward.

“TCS’ overall performance indicated their business strength. Their business pipeline looks strong, and from here, a ramp-up and industry recovery is clearly on the cards," he said. "The key here is valuation—investors are looking at IT services as a strong sector going forward.”

On headcount terms, TCS hired 11,000 freshers during the June quarter, and ended the period with a net addition of 5,452 employees. The comes after the previous fiscal year saw one of the worst headcount declines—both for TCS as well as the entire industry—in the past two decades.

“The headcount addition is a key indicator—subcontracting costs have increased, and net hiring addition suggests an increase in active deals being executed,” Tanksale said.

First off the block

Sengupta’s assessment seems on-point. For TCS, banking and financial services (BFSI) remains the biggest revenue-contributing vertical—contributing $2.32 billion during the June quarter. However, the sector’s revenue contribution fell by 1.6 percentage points year-on-year, after it had contributed $2.35 billion in the year-ago period.

A stronger-than-expected start to this fiscal, analysts said, could indicate that TCS will be among the better performers this year in India’s $254-billion IT services industry.

While TCS’ year-on-year growth struggled, quarterly revenue growth was the strongest since June 2021. The same is also applicable for TCS’ operating margin of 24.7%, which rose 1.5 percentage points since last year.

Net profit for the period rose 7% to $1.44 billion—marginally higher than analysts’ average estimate of $1.43 billion reported by Bloomberg.

The GenAI race

Despite an overall optimistic commentary, questions will remain on why TCS hasn’t scaled up on generative AI projects as well as Accenture Plc.—its biggest global rival.

Accenture, which follows a September to August financial cycle, reported last month that between September last year and May this year, it had signed projects worth over $2 billion in generative AI—considerably more than TCS’ quantum.

Also read | TCS sets the bar: Merges AI and cloud businesses to form Ai.Cloud

“We need to wait for this technology to mature in a way where people know how to deploy it, and how they can reap business benefits,” Krithivasan said. “Many deals we are seeing right now are short-term deals of one or two quarters, but we have started seeing longer-term deals coming in.”

Everest’s Sengupta said that one key hurdle for companies is the slowdown in digital transformation deals.

“Adoption of generative AI will require companies to undertake data structuring and infrastructure upgrades, all of which will add up to digital transformation projects that are slow in the market because of the macroeconomic sentiments. In the immediate future, this is unlikely to change,” he said.

TCS also announced a dividend of 10 per share.

On Thursday, TCS shares gained 0.33% to close at 3,922.70 each on BSE. The 30-share benchmark BSE IT index closed 0.16% higher at 38,180.60 points. The earnings were announced after market hours.

Also read | AI, the purported job-snatcher, is propelling a revival in India's IT hiring

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First Published:11 Jul 2024, 09:07 PM IST
HomeCompaniesCompany ResultsWith one mega hit on home ground, TCS kicks off first quarter on the front foot

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