What TCS Q1 Earnings Mean For The IT Sector

The IT sector has been in a state of flux for the last three quarters, and Tata Consultancy Services Ltd.'s earnings bring little clarity about what lies ahead.

To begin with, there were two key uncertainties in the US market — the Trump tariffs and the 'Big Beautiful Bill'. While the passing of the latter has brought some clarity for the healthcare sector, the Trump tariffs continue to weigh on demand for IT services.

TCS saw a contraction in demand for IT services in Q1 despite booking orders worth $9.4 billion. It says its order pipeline, which consists of advanced-stage deals, has either been deferred or paused as clients have become more cautious with spending. Many clients are facing revenue uncertainty or are unable to maintain their guidance. They are actively pursuing vendor consolidation and signing AI-integrated transformation deals, but are delaying execution until there is more clarity on the demand environment.

TCS is the second company after Accenture to highlight this issue with order inflows — the pipeline is healthy but closures are taking longer.

TCS reported international revenue degrowth of 0.5% in Q1 but has guided for growth in FY26 over the previous year.

Domestic revenues, which fell in Q1 due to the tapering of the BSNL order, are expected to bounce back in the second quarter once the execution starts for the state-run telco’s new order.

The IT major, which expected better margins in the April-June period as the BSNL order tapered off, faced pressure instead due to higher wage costs. TCS made a net addition of over 6,000 employees in anticipation of order execution, but demand contraction in Q1 meant it could not book expected revenues, resulting in higher employee expenses.

In its key markets — North America and the UK — TCS posted marginal growth, while Europe slowed. BFSI in the US is growing, albeit slowly, but other regions remain sluggish. Manufacturing performed better overall, but the auto segment is lagging. Hi-tech performed well, led by aerospace, while retail and communications continue to show stress.

Attrition on a last 12-month basis rose to a two-year high of 13.8%, slightly above the company’s comfort level. This indicates mid-level attrition and potential supply-side issues for specific skill sets. Though TCS has not yet announced any wage hikes for the year, it plans to focus on employee engagement to manage attrition.

Margin management is unlikely to be a major challenge, as TCS plans to push for higher utilisation and productivity in the coming quarters. Utilisation and productivity levels declined during Q1 due to project deferments and the conclusion of some projects. An improvement in utilisation will help the company counter margin pressures if it decides to increase employee compensation or ramps up execution of the new BSNL deal secured in May.

Deals now increasingly include in-built AI components, which TCS is proactively offering to clients. Monetisation of AI services is still at an early stage and remains variable rather than fixed price. Clients are seeking AI integration as part of deal negotiations, including productivity gains built into these contracts.

Global Capability Centres are also affecting the demand environment, but the impact is not as significant as initially expected.