Tata Consultancy Services (TCS), India’s largest software services exporter, has announced its financial results for the first quarter of the fiscal year 2024-25 (Q1FY25).
The results highlight a mix of muted revenue growth, margin contractions, and healthy deal pipelines, painting a complex picture of the company’s performance amidst broader economic uncertainties.
Revenue growth: Slight uptick driven by deals
TCS reported a sequential revenue growth of 1.6% in constant currency (CC) terms for Q1FY25, primarily driven by the ramp-up of previously secured deals and the notable BSNL contract. In rupee terms, the revenue stood at ₹62,323 crore, marking a 1.8% QoQ increase.
This growth, however, is modest when compared to historical averages, reflecting the challenges posed by a slower-than-expected recovery in key sectors such as banking, financial services, and insurance (BFSI).
Profit and margins: Wage hikes take a toll
The net profit for Q1FY25 is projected to fall by 2.9% QoQ, reaching approximately ₹11,997 crore. Analysts from various brokerages had estimated net profit figures ranging from ₹11,853 crore to ₹12,310 crore. This decline is attributed to several factors, with wage hikes being a significant contributor.
EBIT margins have contracted by around 150 basis points (bps) QoQ, landing at approximately 24.7%. The impact of wage hikes, effective from April 1, 2024, alongside increased visa costs, has outweighed operational efficiencies. This margin contraction underscores the ongoing cost pressures faced by the IT giant.
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Stock performance
Ahead of the results announcement, TCS shares closed flat at ₹3,902 per share on the BSE, showing a slight dip from the previous day’s close. Throughout the day, the shares traded in a narrow range, opening higher at ₹3,944.65 and hitting an intraday high of ₹3,979.90.
Despite the modest movement, TCS shares have risen by 2% so far this calendar year and have surged nearly 20% over the past year.
Deal pipeline: Steady but cautious optimism
The deal pipeline remains robust, with new deal ramp-ups and longer working days contributing to the slight revenue growth. The BSNL deal, in particular, is expected to provide incremental revenue of approximately $30 million.
Analysts have highlighted the importance of this deal in bolstering TCS’s growth momentum.
However, there is a cautious outlook on near-term demand and pricing environment. The broader IT services sector is anticipated to exhibit moderate growth, primarily due to weaker discretionary spending driven by macroeconomic uncertainties and the upcoming US elections.
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Key verticals
Demand trends in key verticals such as BFSI, retail, hi-tech, manufacturing, and communications are critical to watch. The BFSI sector, which has been slower to recover, remains a focal point for analysts. ICICI Securities has noted traction in the retail and hi-tech sectors, driven by the deals announced in Q1.
Headcount and hiring
TCS’s headcount is projected to have grown by over 10,000 employees in Q1FY25, marking the first sequential headcount growth in a year. This increase is indicative of the company’s cautious optimism and readiness to capitalise on potential growth opportunities in the coming quarters.
Looking ahead
TCS’s management has expressed cautious optimism for the rest of FY25. CEO K Krithivasan has indicated that while the exact timing of growth recovery is uncertain, there are positive signs on the horizon. He anticipates that the major markets will start turning around, though he refrains from specifying which quarter will see a significant uptick.
Analyst outlook
Analysts’ expectations for TCS’s performance have varied, reflecting the complex economic landscape. Kotak Institutional Equities has estimated a 4.8% YoY jump in net sales, driven by the ramp-up of strong order signings from previous quarters. However, they also anticipate weak revenues in financial services and telecom.
Prabhudas Lilladher has forecasted a 4.6% YoY increase in net sales, with a projected EBIT margin of 24.9%. They expect profit after tax (PAT) to be around ₹12,310 crore, reflecting a 10.7% YoY rise but a 1.5% sequential decline.
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Conclusion
TCS’s Q1FY25 results underscore the company’s resilience in navigating a challenging economic environment. While revenue growth remains modest and margins are under pressure from wage hikes, the healthy deal pipeline and incremental contributions from major deals like BSNL provide a silver lining.
The cautious optimism expressed by TCS’s management and analysts indicates that while immediate challenges persist, the company is well-positioned to leverage growth opportunities in the coming quarters.
As the IT services sector continues to evolve, TCS’s ability to adapt and innovate will be crucial in maintaining its leadership position.
