TCS, HCLTech deliver Q3 revenue surprise amid labour cost headwinds

Both Tata Consultancy Services (TCS) and HCL Technologies beat analyst revenue estimates. TCS reported $7.51 billion in revenue for the quarter, down 0.4% year-on-year (y-o-y) and up 0.6% from the previous quarter. A Bloomberg poll of 32 analysts had expected revenue of $7.43 billion.

HCLTech reported $3.79 billion in revenue in Q3, beating Bloomberg’s estimate of $3.7 billion, and marking growth of 7.4% y-o-y and 4.1% quarter-on-quarter.

More than half of TCS’s incremental revenue came from European clients, which account for almost a fifth of the company’s business, while more than three-fifths of HCLTech’s growth came from the sale of software products and licences, which contribute 11% of its business.

In terms of net profit, TCS reported $1.5 billion, up 3.1% y-o-y and 2.7% sequentially, while HCLTech’s profit of $537 million fell 1.3% y-o-y but rose 10.5% from the previous quarter.

Despite the revenue surprise and healthy profit numbers, profitability remains under pressure due to changes in the government’s labour codes, which mandate that basic pay for employees account for at least 50% of total compensation, thereby raising statutory payouts such as provident fund and gratuity.

As a result, the two companies together incurred nearly $350 million in additional costs in the December quarter—$238 million for TCS and $109 million for HCLTech—squeezing margins.

Demand holds up, visibility diverges

On the bright side, both companies said demand remains strong, although HCLTech sounded more cautious.

“In Q2 (July-September 2025), we had called out that the overall demand environment is improving compared to Q1, so in Q3 that trend continues," said K. Krithivasan, chief executive of TCS, in the company’s post-earnings conference call with analysts on Monday.

He said the company is focusing on short cycle projects, where decision making is faster and returns are clearer. “We see a steady increase (in such projects), and you can see that reflected in our revenue that we are reporting, and this is across all industry segments," Krithivasan said.

Meanwhile, HCLTech’s chief executive C. Vijayakumar pointed to persistent uncertainty in the global market that is leading to slow spending growth. However, “the fundamental demand for technology as a driver for business transformation remains structurally intact," Vijayakumar said during the company’s post-earnings press conference on Monday.

He added that discretionary spending is emerging in new pockets, and the company’s “focus is on proactively identifying where the new spending is occurring and targeting those opportunities".

HCLTech lowered the upper end of its full-year guidance to 4-4.5% from 3-5% outlined in October.

“Despite sector-wide challenges such as economic uncertainty and talent retention, HCLTech’s strategic focus and investments in next-generation technologies position it well to support clients’ evolving needs and drive sustainable growth in a dynamic market," said Shubham Rathore, principal analyst at Gartner.

TCS, which does not provide quarterly or full-year revenue guidance, reiterated expectations of higher international revenue this year, but the tone of the commentary has softened.

In April last year, the company—which derives over 94% of its revenue from overseas markets—had said it was “confident" that international business would grow faster in the current fiscal year than in 2024-25, but on Monday, Krithivasan said this now remains an “aspiration".

In addition, TCS incurred costs worth $350 million in Q3 on two accounts—the government’s labour codes, and a provision for a legal claim arising out of a case filed against the company by Computer Sciences Corporation alleging trade secret misappropriation.

"Impact of labour codes and the legal claim were the negative surprises to the profitability," said Karan Uppal, vice-president at Phillip Capital. “The decline in revenue from BFSI is a cause of concern whereas the growth in the India business was surprising because the BSNL deal got pushed out."

TCS's revenue from banks and financial institutions declined 0.4% sequentially to $2.39 billion. On the other hand, its revenue from India jumped 5.8% sequentially to $458 million.

Different maths for FY26 finish

Both companies stare at different endings to the current fiscal year.

TCS ended the first nine months of FY26 with $22.4 billion in revenue, meaning that it needs $7.78 billion to match last year’s revenue of $30.18 billion. For this, the company would have to report a sequential growth of 3.65%—its fastest pace in five years.

The task of besting last year’s revenue growth is relatively simpler for HCLTech, which needs $2.86 billion in the fourth quarter to meet last year’s revenue of $13.84 billion. To miss this, the company would have to report a sequential revenue decline in double digits in the fourth quarter.

Even as both companies have had contrasting fortunes, there is a commonality, as they are amongst the only companies amongst the top five to share AI metrics. HCL reported $146 million in revenue from AI, taking its total tally to $246 million. The company was the first of the top five to share AI metrics in October last year.

On the other hand, TCS reported $1.8 billion in annualised revenue from AI services, up 17.3% on a quarterly basis in constant currency terms. On 17 December, TCS quantified its AI revenue for the first time, stating that it got $1.5 billion in annualised AI revenue as of September 2025. However, the IT outsourcer did not specify how it defines AI-related revenue, for now.

Both companies said automation would take centre stage in the current calendar year, even as adoption of AI agents might be slow.

“Technology expenditures remain centered on validated solutions and simplified architectures. AI adoption is increasing, undertaken by robust governance and regulatory alignment, although agentic AI implementation is proceeding cautiously," said Krithivasan.

Margin issues

A key cause of concern for both companies was on the operating margins. While TCS’s operating margins remained unchanged from the previous quarter at 25.2%, HCLTech reported 18.6% in operating margins, up 110 basis points.

Much of HCLTech’s margins were pushed by the sale of software products, which has less cost as no human billing is done. However, the operating margins do not factor in the $109 million costs incurred by the implementation of the labour codes.

In terms of people, TCS cut headcount by 11,151 employees in the last quarter to end with 582,163 employees. This marks the fourth consecutive year where the company has cut headcount in the third quarter and the third time in FY26.

Much of this was on account of the layoffs announced in July last year, where the company said it would give marching orders to 12,200 middle and senior-level employees who could not be skilled.

HCLTech cut headcount by 261 to end last year with 226,379 employees.