TCS Q2 preview: Can CEO Krithivasan steer the IT giant out of its rough patch?
TCS faces multiple challenges, including a potential revenue decline and layoffs that could impact morale. The company’s growth has slowed, and new visa regulations may further impact its performance. Will TCS break its growth drought in Q2 under CEO Krithivasan?
In business, a quarter can feel like a lifetime. Ask Tata Consultancy Services Ltd's chief executive officer, K. Krithivasan.
The July-September period tested the country’s largest IT services firm on several fronts—one external, and two self-made challenges.
On the external front, US President Donald Trump's decision to hike the H-1B visa fee to $100,000, starting next year, rattled India's tech majors. Mid-cap companies have said it won't hurt them, but analysts unanimously agree that it will hurt the big five, including TCS.
Internally, growth has slowed with a few analysts even expecting TCS to report a full-year revenue decline, its first since the company went public in 2004. That's only half the worry.
The immediate and larger battle faced by Krithivasan and his team is how to motivate the company's over 600,000 troops in the backdrop of its plan to lay off 2% or 12,000 engineers.
Morale inside the company has hit rock bottom. For Krithivasan, reviving the company from this point is a Herculean task because growth appears elusive amid a gloomy and uncertain environment. The rise of artificial technologies has further muddied waters and poses an existential risk to firms like TCS.
The shipmaster
Under Krithivasan, TCS added $1.19 billion in incremental revenue, far less than his predecessors. In this time, Infosys and HCLTech added $873 million and $847 million, respectively. Lack of big-ticket deals, business leakages to smaller peers, automation tools resulting in fewer billings, and an uncertain demand environment are some of the contributing factors that also make one wonder what can make Krithivasan prove the naysayers wrong.
Investors, too, are losing patience. Shares of TCS have declined 27.2% since the start of the year, making it the worst performer among the country’s big four, even as the BSE Sensex gained 4.58% in this period.
Adding to the unease, there is now little chance of seeking answers from Krithivasan as TCS, for the first time in its history, has cancelled its customary post-earnings press briefing. The company has not given a reason. The only hope now is that analysts obtain answers from the management when it engages with them after declaring its earnings.
Amid this, Mint highlights five key points to watch when TCS declares its second-quarter earnings on Thursday.
Growth trajectory
TCS’s primary concern is to boost its topline. While the company bagged a $640 million deal with Tryg, a Scandinavian insurance firm, last month, much work needs to be done. At least six brokerages expect the company to report 1% sequential growth at best.
“The ramp-downs in a few accounts and share losses could lead to moderate growth," said Kotak Institutional Equities analysts in a note dated 1 October.
Added uncertainty on tariff and visa policies in the US, its largest market, might cast a shadow on the company’s revenue coffers, as clients might pull back their tech spending to Indian IT outsourcers. To be sure, TCS does not give out any revenue guidance but its commentary on growth and future demand outlook will be gauged.
The BSNL factor
Over the last two years, TCS’s growth was powered by a single client – BSNL. The IT services company signed a 4G network deployment deal with BSNL worth a billion dollars, in May 2023. At least two brokerages have not factored in BSNL contributing to the company’s growth in the second quarter, with one of them expecting a revenue decline due to the completion of the BSNL deal.
“We expect revenue to decline by 0.5% q-q in cc (constant currency), mainly led by falling contribution from the BSNL project," said Nomura analysts Abhishek Bhandari and Karan Nain, in a note dated 1 October. This means that the company’s plans of backfilling this revenue will be gauged when the management interacts with analysts tomorrow.
H-1B backlash
According to the US Citizenship and Immigration Services, TCS is the second-largest user of H-1B visas, getting about 5,505 such visas, or almost a tenth of all available H-1B visas. US lawmakers, led by President Donald Trump, have upped the ante against users of H-1B visas, claiming big tech companies, including homegrown IT outsourcers, are misusing these visas.
On 24 September, judiciary committee members Charles E. Grassley and Richard J. Durbin wrote to CEO Krithivasan over the company’s hiring practices, stating that TCS is under investigation for allegedly firing older American workers in favour of newly hired South Asian H-1B employees. Earlier in the same month, Ohio Senator Bernie Moreno proposed the Halting International Relocation of Employees (HIRE) Act to impose taxes on companies that outsource IT work.
In this light, the company’s commentary on its operating margin and plans to assuage concerns of US policymakers will also be sought.
Layoffs and morale
TCS’s decision to lay off 2% of its employees was met with anger, uncertainty, and fear amongst a bulk of its 600,000 workforce. Many employees across the rank and file of the company have stated that the TCS did not plan these layoffs and that they were forced. While some are crying foul over redeployments and skill mismatch, others are being pulled out of projects.
The management will not only be questioned about the planning of the layoffs, but also about reports of scuffles among employees.
The AI puzzle
TCS’s AI strategy has been in a state of flux. TCS first established its AI.Cloud business unit in August 2023, which provided AI and cloud services collectively. In May this year, TCS split this unit into ‘AI & Data’ and ‘Cloud’ units, respectively. Siva Ganesan, who led the first AI unit, was put in charge of AI & Data, while his deputy Krishna Mohan, took over the charge of Cloud. However, a third change ensued last month with the formation of the “AI and Services Transformation Unit" to be headed by veteran Amit Kapur.
Since then, Ganesan resigned, and the company is also expected to hire fewer AI engineers this year than last. Analysts will track comments on the AI roadmap for a company that has not disclosed revenue and order bookings from the new technology, at a time when a larger peer did. Accenture got $2.7 billion in Gen AI revenue, with order bookings of $5.9 billion last fiscal.
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