TCS Q1 Results: Profit Drops Nearly 3% Amid Flat Revenue Growth

Growth at India’s largest IT services firm was muted in what is traditionally the strongest quarter for the $245-billion domestic outsourcing industry.

TCS’ growth in the quarter was led by its life sciences and healthcare vertical that grew 10.1%, followed by manufacturing (9.4%), technology and services (4.4%), and retail (5.3%). The company’s breadwinner—the financial services vertical, which draws in 38% of overall revenue—grew by a mere 3%, while the communications and media segment was up 0.5%.

Geographically, TCS’ growth in the U.K. (16.1%) far outpaced those seen in the traditional strongholds of North America (4.6%) and Europe (3.4%). Even emerging markets—Middle East and Africa (15.2%), India (14%) and Latin America (13.5%)—clocked double-digit growth rates for the company.

“Clients continue to reprioritise, preferring business critical projects and those with a faster return on investment,” TCS said in a statement. “Cost optimisation, vendor consolidation and integrated operations are high on priorities.”

That India’s IT bellwether clocked a total contract value of $10.2 billion, up from $10 billion in Q4 FY23, amid flat revenue growth shows clients are focused on cost efficiency deals and not discretionary spending. That also highlights project deferrals and delays, even as long-term contracts take precedence.

“TCS is not seeing any pricing pressure, but there’s some reprioritisation,” Chief Operating Officer N Ganapathy Subramaniam said, in the post-earnings media interaction. “There are project delays and deferments, but there aren’t any large-scale rampdowns and insourcing moves.”

Moreover, the company is witnessing a large number of smaller deals of up to $100 million as that gives clients more flexibility, Subramaniam said.

The biggest deal struck during the April-June quarter was with U.K.’s pension fund STEM.

Operational profitability of the Tata Group firm declined 130 basis points, largely on account of wage hikes that were rolled out on April 1. Employee costs, not limited to salary, rose 15.89% year-on-year to Rs 35,148 crore in the April-June quarter. Subcontracting costs made up 7.4% of revenue in the first quarter.

“Our operating margin of 23.2% reflects the 200 basis points impact of this hike, offset through improved efficiencies,” Samir Seksaria, chief financial officer at TCS, said. “At the same time, we continue to make the investments needed to power our future growth, including expansion of our delivery and research infrastructure.”

But revenue is unlikely to return in a hurry, not in the face of macro uncertainties, and that’s likely to weigh on the margin. The targeted double-digit growth appears to be a tall order this year, Subramaniam said. But Krithivasan is still focused on achieving a 26-28% EBIT margin, even in the longer term. 

“There’s a growth fear after a flat Q1,” the CEO said. “We are still targeting (26-28%), and there are still several margin levers in play to achieve that.”

Amid a purported bribes-for-jobs scam, which the senior management refused to comment on in the post-earnings briefing, TCS’ net hiring for the April-June quarter stood at a mere 523 employees. As on June 30, the overall stood at 6,15,318, with the attrition rate easing 230 basis points to 17.8% on a trailing 12-month basis.

“There has been some delay in onboarding due to project delays,” Milind Lakkad, chief human resources officer at TCS, said at the press meet. “But we’ll honour all offers.” The company plans to hire 40,000 freshers this year, but how that will be spread out is still a work in progress.

As for those already employed, TCS has handed out 12-15% salary hikes to exceptional performers, 8-10% for the high performers, and 6% for the rest. The company will give 100% variable pay to 70% of its staff, Lakkad said.

More than half of the workforce of India’s largest private employer is already in the office three times a week. Overall, they have logged in 12.7 million learning hours for upskilling in generative AI, cloud, and data analytics.

On Wednesday, shares of TCS fell 0.36% to Rs 3,260.20 apiece on the BSE, even as the benchmark Sensex ended the day 0.34% lower at 65,393.90 points. The results were declared after market hours.