TCS slid on Trump tariffs and AI disruptions; what’s next?
·
Trump may finalize his tariff policies by H2CY25
with a less hawkish approach ~10-15% weighted average effective rates.
·
This would be positive for discretionary IT
spending on both sides of the Atlantic (US-Europe); an Indian IT service
company like TCS may benefit.
·
TCS is also aggressive in adapting itself to
changing business models, including the increasing AI disruptions
Tata Consultancy Services (TCS), India’s largest IT
services company, reported a lackluster performance in the first quarter of
fiscal year 2026 (Q1FY26, April–June 2025), with a year-on-year (YoY) revenue
growth of just 1.3% to ₹63,437
crore, a 3.1% decline in constant currency (CC) terms, and a 1.1% drop in USD
terms to $7,421 million. Despite a 6% YoY increase in net profit to ₹12,760 crore- aided by a one-time interest income
of ~₹600 crore, the results fell short of market
expectations, marking a challenging start to FY26 amid lingering Trump trade
& Tariff war, subsequent macroeconomic & discretionary IT/digital
spending uncertainties by big corporates, geopolitical challenges & trade
fragmentations affecting supply chains, and the transformative impact of
artificial intelligence (AI); i.e. changing business model for traditional
Indian IT service providers like TCS.
Snapshot of
TCS report card for Q1FY26: TTM basis
If we consider TTM figures, operating revenue of
TCS grew only 0.3% in Q1FY26, and overall run rate and trend are pointing
towards 0.5% growth in core operating profit for next quarter Q2FY26. The TTM
core operating EPS (CEPS) for Q1FY26 was ₹184.50 vs 179.50 (Y/Y); i.e., a growth of 0.3%
Reasons for
Subdued Q1FY26 Performance: TCS Management
Macroeconomic
and Geopolitical Uncertainties: Client Spending Delays:
TCS’s management, led by CEO K Krithivasan,
identified global macroeconomic and geopolitical uncertainties as primary
drivers of the subdued performance. Clients in key markets like the U.S. and
Europe adopted a cautious approach, prioritizing projects with clear return on
investment (ROI) and deferring discretionary spending. Krithivasan noted, “Global
businesses were disrupted due to conflicts, economic uncertainties, and supply
chain issues,” leading to “previously unseen project pauses, deferrals, and
decision delays”. This caution was particularly evident in North America, which
saw a 1.1% YoY revenue decline, and Continental Europe, with marginal growth of
0.9%.
The Consumer Business Group (CBG) faced significant
challenges, including “funding delays, project postponements, and delayed
milestone completion”, reflecting the broader impact of economic headwinds. Krithivasan
noted that global businesses faced disruptions due to conflicts, economic
uncertainties, and supply chain issues, leading to “previously unseen project
pauses, deferrals, and decision delays”. This was a continuation and intensification
of trends observed in Q4FY25, impacting revenue conversion from signed deals.
Regional
Weakness:
North America, TCS’s largest market, saw a 1.1% YoY
revenue decline, while Continental Europe grew marginally by 0.9%. The Consumer
Business Group (CBG) was particularly affected, with “funding delays, project
postponements, and delayed milestone completion”. BFSI also saw cautious
spending, especially in U.S. insurance, though Europe’s insurance segment
performed better.
A key
external factor was the U.S. trade policy under the second Trump
administration, particularly
the 26% reciprocal tariffs on Indian imports announced in April 2025. While IT
services are not directly targeted, these tariff uncertainties are delaying
business capex decisions and squeezing client discretionary budgets in sectors
like manufacturing (14% of TCS revenue) and retail (15.9%), indirectly reducing
IT spending. Krithivasan highlighted that “unless almost all the trade deals
are announced, there will be this lack of clarity,” delaying client decisions.
This uncertainty exacerbated the demand contraction, contributing to the 3.1%
constant currency revenue decline.
BSNL Deal
Ramp-Down:
The completion of a major strategic program with
Bharat Sanchar Nigam Limited (BSNL) was a significant contributor to the
revenue shortfall. The BSNL deal, which drove a 61.8% YoY revenue surge in
India in Q1FY25, had a 2.8% negative impact on the 3.1% constant currency
revenue decline in Q1FY26 as it wound down. This high base effect created a challenging
YoY comparison, particularly for the India market, which had previously been a
growth driver. Management clarified that no other client-specific situations
significantly impacted revenue, isolating the BSNL ramp-down as a key factor.
Delayed Deal
Conversions and Demand Contraction-Employee cost over run
TCS experienced delays in deal conversions and
project ramp-ups, driven by clients’ focus on cost optimization and vendor
consolidation. Enterprises reprioritized or extended project timelines, reducing
the pace of execution. For example, Krithivasan noted instances where clients
“ramped down the number of people engaged” or extended deal durations to manage
spending. This led to a sequential revenue drop of 0.6%, sharper than analyst
expectations of a 1.4% decline. The demand contraction also impacted
utilization, as TCS had built excess capacity anticipating growth that did not
materialize, pushing employee costs to 47.6% of revenue, an all-time high.
AI
Disruption and Transition Costs:
The rapid adoption of AI, particularly generative
AI (GenAI), is disrupting traditional IT outsourcing, a core revenue stream for
TCS. Clients are shifting from legacy services to AI-driven solutions, reducing
demand for routine tasks like application maintenance and testing. This
transition contributed to revenue pressure, as TCS invested heavily in AI
skilling and capacity building. The company trained 114,000 employees in
higher-order AI skills, with 15 million hours invested in emerging technologies.
These investments, while critical for long-term competitiveness, increased
employee costs and pressured margins, which improved only modestly by 30 basis
points to 24.5% due to lower third-party costs and currency tailwinds.
While not explicitly cited as a direct cause of
revenue decline, management acknowledged that AI is reshaping client
priorities, with enterprises focusing on “cost optimization, vendor
consolidation, and efficiency-led technology transformation”. The shift from
legacy services to AI-driven solutions requires significant investments,
contributing to higher employee costs and margin pressure. TCS’s lag in AI
leadership compared to global competitors like Accenture was noted as a
challenge in capturing high-growth AI segments.
Margin and
Attrition Challenges:
Despite the net profit growth, the operating margin
remained below pre-BSNL levels, reflecting the cost of carrying excess capacity
and higher Quality Variable Allowance (QVA). Attrition rose to 13.8%, up 50
basis points sequentially, driven by competition from global capability centers
(GCCs) and demand for AI-specialized talent. Management’s decision to defer
salary hikes due to demand uncertainty aims to preserve margins but risks
further attrition, posing a challenge for workforce stability; human resource
(HR) cost is the primary ‘raw material’ (RM) of Indian IT service providers, and
contributes over 55% of TCS’ operating revenue. In Q1FY26, the TCS HR cost grew
by 0.9% (y/y), against revenue growth of 0.3%. But TCS somehow ‘managed’ the
overall operating expenses by curtailing other discretionary operating expenses
by -1.6% (y/y).
Demand Contraction
and Utilization Impact:
A late-quarter demand contraction led to lower
utilization, as TCS had built excess capacity anticipating growth that did not
materialize. Employee costs rose to 47.6% of revenue, an all-time high, partly
due to higher Quality Variable Allowance (QVA) and tactical interventions like
promotions. This mismatch between capacity and demand has pressured margins,
despite a 30-basis-point improvement to 24.5% driven by lower third-party costs
and currency tailwinds.
TCS Management
Guidance for FY26
TCS’s management provided a cautiously optimistic
outlook for FY26, balancing near-term challenges with medium-to-long-term
growth prospects:
Near-Term
Outlook:
Krithivasan expressed caution for Q2FY26, noting
that macroeconomic uncertainties, including U.S. trade policy changes, will
likely continue to delay client decision-making. He stated, “Unless almost all
the trade deals are announced, there will be this lack of clarity” regarding
client spending. Residual effects of Q1 project delays may impact Q2, but
management expects Q2 to be “at least better than Q1” if no further delays
occur. No specific revenue guidance was provided, consistent with TCS’s policy.
However, management is optimistic that FY26 international business revenue will
outperform FY25 in constant currency terms, driven by a robust deal pipeline.
Deal
Pipeline and TCV:
TCS signed deals worth $9.4 billion in Q1FY26, up
13.2% YoY, with $4.4 billion from North America, $2.5 billion from BFSI, and
$1.6 billion from CBG. Krithivasan emphasized that the pipeline remains “very
healthy and well distributed across verticals and geographies,” with
replenishment matching deal closures. This gives confidence in TCS’s
customer-centric strategy, despite short-term conversion challenges.
AI and
Digital Transformation: TCS is reshaping itself.
Management highlighted strong demand for AI and
generative AI (GenAI), with enterprises moving from pilots to production-grade
rollouts. TCS’s AI pipeline doubled to $1.5 billion, and 114,000 employees are
trained in higher-order AI skills. Key offerings like WisdomNext™ (enhanced
with agentic AI), ignio™, TCS BaNCS™, and TCS MasterCraft™ are driving growth
in AI-led transformation, automation, and legacy modernization. Case studies,
such as AmTrust’s AI-driven insurance quoting solution (reducing quote time
from 30 to 5 minutes) and Foxtel’s GenAI-powered customer service
transformation, demonstrate TCS’s growing AI capabilities.
Margin
Outlook:
Operating margins (24.5%) were supported by lower
third-party costs and currency benefits but remained below pre-BSNL levels
(25–26%) due to investments in capacity and AI skilling. Management deferred
salary hikes due to demand uncertainty, which could maintain margins but risks
higher attrition (13.8% in Q1FY26, up 50 basis points sequentially). For the
rest of FY26, TCS aims to improve margins through better utilization,
productivity, and pyramid optimization.
BSNL Deal
Update:
A new BSNL advance Purchase Order was received in
May 2025, but execution waits for circle-wise POs. Management expects a similar
trajectory to the previous BSNL deal (100,000 sites) once execution begins,
potentially from Q2 or Q3FY26. The new BSNL deal, still in the Purchase Order
(PO) stage, may pressure margins due to its revenue mix but is not yet included
in TCV.
Impact of
Trump’s Policy Tantrum on TCS:
Trump’s uncertain trade & tariff policies have
indirectly impacted the Indian IT services industry by creating uncertainty and
reducing client budgets in key sectors. The transcript confirms that U.S. trade
deal uncertainties, including tariffs, contributed to client caution, particularly
in North America. Krithivasan noted that “till almost all the trade deals are
announced, there will be this lack of clarity,” delaying project decisions in
BFSI and CBG. The 1.1% YoY revenue decline in North America reflects this
caution, compounded by tariff-induced budget constraints in manufacturing and
retail.
Key
management comments & mitigation:
TCS’s localization efforts (175,000+ U.S. jobs created by 2019) reduce exposure
to potential H-1B visa restrictions, a concern during Trump’s first term.
TCS MD
& CEO Krithivasan:
“Looking ahead, enterprises realize the need to
invest in being perpetually adaptive and require a dependable partner that can
provide them with not only the right capabilities, but also the scale and
maturity to manage a dynamic environment. TCS aims to be that partner that helps
our clients withstand short-term disruptions, even while executing their
transformation strategy, for long-term value creation. In this context, we are
very confident in the robustness of the demand as well as the strength of our
business model from a medium to long-term perspective.
We are closely monitoring developments worldwide
and remain committed to maintaining strong client relationships, positioning ourselves
as a strategic partner. The continued global macroeconomic and geopolitical
uncertainties caused a demand contraction. On the positive side, all the new
services grew well. We saw robust deal closures during this quarter. We remain
closely connected to our customers to help them navigate the challenges
impacting their business, through cost optimization, vendor consolidation and
AI-led business transformation”.
Aarthi Subramanian,
ED, President and COO:
“Across industries, clients are increasingly
shifting their focus from use case-based approach to ROI led scaling of AI. We
are investing across the AI ecosystem including infrastructure, data platform
solutions, AI agents and business applications. Launching TCS SovereignSecureTM
Cloud, TCS DigiBOLTTM, and TCS Cyber Defense Suite, to accelerate India’s AI-led
transformation, was a particular highlight of this quarter”.
Samir
Seksaria, CFO:
"We continued our investments in long-term
sustainable growth this quarter. We stayed agile and adapted to the dynamic
environment, delivering steady margins. Our industry-leading profitability
alongside robust cash conversion positions us well to make strategic
investments for the future”.
Milind
Lakkad, Chief HR Officer:
“Talent Development is core to TCS. In this
quarter, our associates invested 15 million hours in building expertise in
emerging technologies, enabling them to lead the transformation journey for our
customers. It is gratifying to note that TCS now has 114,000 people with higher-order
AI skills”.
Impact of
AI Disruption on TCS
AI disruption is reshaping the Indian IT services
industry, posing both challenges and opportunities. The Q1FY26 concall
transcript highlights TCS’s proactive response to AI, with parallels to
Infosys’s strategy:
Challenges: The transcript notes that enterprises are
prioritizing “AI-driven innovation” and “efficiency-led technology
transformation”, reducing demand for traditional outsourcing. This shift
contributed to Q1FY26 revenue pressure, as legacy services face disruption.
TCS’s lag in AI leadership compared to Accenture limits its ability to fully
capitalize on high-growth AI segments.
Opportunities:
TCS is countering disruption with significant AI investments
·
AI Pipeline: A
$1.5 billion AI/GenAI pipeline, doubled from prior quarters, reflects growing
client interest.
·
Workforce
Skilling: 114,000 employees trained in higher-order AI skills, supporting
production-grade AI rollouts
·
Case Studies:
Examples include AmTrust’s AI-driven quoting solution and Foxtel’s
GenAI-powered customer service transformation, which won the 2025 ISG Paragon
Award. These demonstrate TCS’s ability to deliver measurable business outcomes.
·
Platforms:
WisdomNext™ (with agentic AI), ignio™, and TCS MasterCraft™ (automating legacy
modernization) are driving AI adoption.
·
Management
Commentary: Krithivasan emphasized proactive AI infusion in all projects, not
just renewals, to enhance productivity and outcomes.
·
Contracts are
structured flexibly, using both fixed-price and time-and-materials (T&M)
models, reflecting the evolving nature of AI engagements.
Future
Prospects for TCS
Despite the subdued Q1FY26 performance, TCS’s
management remains cautiously optimistic about FY26, supported by a robust deal
pipeline, AI investments, and strategic positioning.
Robust Deal
Pipeline and TCV
TCS reported a Total Contract Value (TCV) of $9.4
billion in Q1FY26, up 13.2% YoY, with $4.4 billion from North America, $2.5
billion from BFSI, and $1.6 billion from CBG. Krithivasan emphasized that the
pipeline is “very healthy and well distributed across verticals and
geographies,” with replenishment matching deal closures. This strong order
book, within TCS’s “comfort zone” of $7–9 billion, signals resilience despite
short-term conversion delays. A new BSNL advance Purchase Order received in May
2025, awaiting circle-wise POs, could further boost revenue from Q2 or Q3FY26,
potentially replicating the scale of the previous 100,000-site deal.
AI is a
double-edged sword for TCS, disrupting
legacy services but creating new revenue streams. The company’s AI/GenAI
pipeline doubled to $1.5 billion, reflecting growing client demand for production-grade
AI rollouts. Key platforms like WisdomNext™ (enhanced with agentic AI), ignio™,
and TCS MasterCraft™ are driving automation and modernization, with
MasterCraft™ reducing legacy modernization costs by up to 70%. Case studies,
such as AmTrust’s AI-driven quoting solution (reducing quote time from 30 to 5
minutes) and Foxtel’s GenAI-powered customer service transformation (winning
the 2025 ISG Paragon Award), demonstrate TCS’s ability to deliver measurable
outcomes.
TCS’s partnerships with hyperscalers like Microsoft
and its focus on AI-led business transformation, AI-enabled SDLC/IT-Ops, and
data platform modernization position it to capture emerging demand. In
contrast, Infosys’s early pivot to AI (Nia, Cobalt) has driven 5.79% revenue
per employee growth since FY22, giving it a slight edge in digital agility.
However, TCS’s scale and 114,000 AI-trained employees provide a strong
foundation for long-term growth.
Margin and
Operational Efficiency
TCS aims to improve margins in FY26 through better
utilization, productivity, and pyramid optimization. The deferral of salary
hikes preserves short-term margins but risks higher attrition, which management
must address through retention strategies. The new BSNL deal may pressure
margins due to its revenue mix, but TCS’s strong cash flow (₹12,804 crore, 100.3% of net income) and interim
dividend of ₹11 per share
underscore its financial stability. Strong balance sheet of TCS may also
provide robust organic & inorganic expansion.
Business Models
Tata
Consultancy Services (TCS)
TCS, a flagship company of the Tata Group, is
India’s largest IT services firm, headquartered in Mumbai. Established in 1968,
it operates in 150 locations across 46 countries, employing over 613,000
professionals as of June 2025. TCS offers a consulting-led, cognitive-powered
portfolio that includes IT services, digital transformation, cloud
infrastructure, and business process outsourcing (BPO). Its business model
emphasizes long-term client relationships, particularly with Fortune 500
companies, and a diversified revenue stream across industries such as Banking,
Financial Services, and Insurance (BFSI, 32.6%), consumer business (15.9%),
life sciences (10.9%), and technology services (8.6%). The US (~44%) and UK
(~17%) are TCS’s primary markets, constituting over 60% of revenue.
TCS’s Machine First™ Delivery Model (MFDM™)
leverages automation and artificial intelligence (AI) to streamline business
processes, positioning it as a leader in large-scale digital transformation
projects. The company’s global delivery model, pioneered in the 1970s, ensures
cost-effective service delivery through offshore development centers, particularly
in India. TCS’s strong focus on research and development (R&D), exemplified
by the Tata Research Development and Design Centre (TRDDC) established in 1980,
drives innovation in areas like AI, blockchain, and cybersecurity
Long-Term
Industry Trends
The Indian IT services industry faces structural
challenges from AI disruption, with 3–5% of 5 million jobs (150,000–250,000) at
risk over 3–5 years due to automation of routine tasks like testing and support.
However, we can expect at least 6–8% sector growth in FY26, driven by AI and
cloud adoption. TCS and Infosys are mitigating job displacement through
reskilling, with TCS training 114,000 employees in AI and Infosys focusing on
digital hires. Competition from global players like Accenture, which leads in AI
innovation, remains a challenge, but TCS’s diversified portfolio and strong
client relationships provide a competitive edge.
TCS: FY25
P&L Report card
Overall FY25 and Q1FY26 trend, management
commentaries, and various pros & cons as discussed above, TCS may report
5-10% growth in CEPS (core operating EPS) for FY26; assuming 6% CAGR in CEPS,
TCS may report CEPS ~195 against 184 in FY25.
Quantitative
Analysis: Fair Valuation-TCS: Fundamental View
Average
Fair Value: TCS: FY: 25: 2792; FY26: 4389; FY27: 4652; FY28: 4931
Technical
View: TCS
·
Technical
support (demand) zone: 3050/2975*-2880/2850
·
Technical
resistance (supply) zone: 3650/3850-4000/4250/4600
TCS’s subdued Q1FY26 performance reflects
macroeconomic uncertainties, the BSNL deal ramp-down, delayed deal conversions,
and AI-driven disruption of legacy services. However, the company’s $9.4
billion TCV, $1.5 billion AI pipeline, and investments in platforms like
WisdomNext™ and ignio™ position it for recovery. By leveraging localization,
reskilling, and AI-driven transformation, TCS can navigate near-term challenges
and capitalize on long-term opportunities in the U.S., UK/EU, and emerging
markets. Compared to Infosys, TCS’s scale offers stability, though Infosys’s
digital agility provides a growth edge. Trump may finalize his tariff dealswith various key trading partners by August-December 2025, which may be less
hawkish than assumed. Thus in 2026, there would be less trade, leading to normalized
performance by TCS; it may even report ~10-15% normalized CAGR from FY27-28
also (as per longer-term trend) amid accelerated digital/AI adoption.
Disclaimer: I
am an NSE-certified Level-2 market professional (Financial Analyst- Fundamental
+ Technical) and not a SEBI/SEC-registered investment advisor. The article is
purely educational and not a proxy for any trading/investment
signal/advice. I am a professional
analyst, signal provider, and content writer with over ten years of experience.
All views expressed in the blog are strictly personal & independent and may
or may not match with any organization with, I may be associated.
If you want
to support independent & professional market analytics, you may contribute
to my PayPal A/C: asisjpg@gmail.com
For any
professional consultation about the financial market (EQ/COMM/FX), investment,
trading ideas, and real-time, professional-grade perfect signals, please DM:
ashishghoshjpg@gmail.com or ping me at Telegram id: asisjpg
