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

Tata Consultancy Services Ltd. 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.

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”.

Like Accenture, TCS’s total order bookings were a sore point. While Accenture’s new order bookings during the March-May period were at almost a two-year low, TCS’s new orders in Q1 worth $9.5 billion were significantly lower than the preceding quarter’s $12 billion and marginally better than in the October-December 2025 period.

Analysts said TCS’s revenue was higher than expected, and attributed the lack of growth to the West Asia conflict.

“Revenue was better than expected mainly on account of AI work as part of the large BFSI deals the company won over the last two years,” said Amit Chandra, vice-president for HDFC Securities, adding that this helped the company offset deflation from its consumer business, which was hit by supply chain disruptions triggered by the West Asia war.

Meanwhile, the company’s operating margin fell 130 basis points (bps)—100 bps equal 1%—from the preceding quarter to 24%. Much of this fall was on account of wage hikes it gave during the quarter, and higher wage costs after it increased its workforce by 9,279 to end with 593,798 employees at the end of June.

The company also outlined fresher hiring plans. “Last quarter we hired 14,000 campus grads, and as we speak, we are in the top universities across the country, and hiring for talent specifically looking for AI-native roles,” said Sudeep Kunnumal, chief human resources officer of TCS, during the company’s post-earnings conference call.

Aarthi Subramanian, chief operating officer of TCS, said during the call that AI is being brought into execution much earlier than before. “Whether it’s in ops (IT operations) or in transformation, AI is part of the day-one proposition and execution, so that brings a certain acceleration to the transformation and also to the execution.”

On Thursday, the company reported annualized AI revenue of $2.6 billion. It had earlier in April reported annualized AI revenue of $2.3 billion.

TCS’s flat results underline a sharp sell-off in shares since the start of the year due to AI advancements prompting investors to write-off IT services firms.

The company’s shares, which fell to a six-year low last week, have plummeted 36% since the start of the year, which is more than peers. It ended Thursday 0.52% down at ₹2,047.75.

This comes after the company made arguably its largest pivot in November last year by announcing its entry into the data centre business. TCS is expected to invest $6.5 billion over six years to build 1 gigawatt (GW) of data centre capacity.

Still, revenue from this business is not expected anytime soon as the land parcel for building the data centres is not finalized, which is expected to delay construction and, therefore, revenue.