BSNL blues to global gloom, TCS clocks yet another bleak quarter

Mint

10-07-2025

Tata Consultancy Services Ltd kicked off the earnings season on a gloomy note on Thursday, clocking a third straight quarter of lower revenue, as its global clients awaited clarity and its Indian business engines cooled.
India's largest IT services company recorded revenue of $7.42 billion in the June quarter, down 0.59% from the preceding quarter and 1.12% from a year before. The earnings lagged estimates of 33 analysts polled by Bloomberg, who expected TCS to clock $7.54 billion in revenue. This was the Mumbai-headquartered company's worst Q1 performance since June 2020 when its revenue fell 7% sequentially.
Managing director and chief executive K. Krithivasan sounded cautious when he spoke to reporters after the earnings announcement.
Decision delays
'We had spoken about delays in decision-making and project starts with respect to discretionary investments. This trend has continued and intensified to some extent in this quarter, and global businesses were disrupted due to conflicts, economic uncertainty, and supply chain issues," Krithivasan said.
Slower decision-making means fewer contracts for IT services firms. It also signals that some of the contracts awarded to IT outsourcers might take time to get billed.
American depository receipts (ADRs) Infosys ADR and Wipro opened 3.7% and 5% in the US, following TCS's disappointing earnings and management commentary.
For TCS, there are bigger worries. Until last quarter, much of its growth was driven by Bharat Sanchar Nigam Ltd (BSNL), the state-run telecom company which awarded a $1.83 billion contract to the company two years ago. Notably, the IT outsourcer will not be getting much revenue from BSNL in future.
This is expected to reduce revenue from its home turf, which brought much of its growth last year. TCS got $430 million from local businesses in the June quarter, down 31% on a sequential basis.
Slow local
'The decline in revenue is led by the India business, primarily on account of lesser business from BSNL. The follow-on BSNL deal was supposed to ramp up at the end of Q1, but it looks like even that has not happened," said Abhishek Pathak, lead analyst at Motilal Oswal.
Revenue from regional markets, including India, declined 13.6% sequentially to $994 million. The decline in local business dragged overall growth, even as the company's revenue increased in the Americas and Europe on a quarterly basis. TCS had won a contract for additional business worth ₹2,903 crore (around $338 million) from BSNL in May this year.
'The ramp-up of the follow-on purchase order from BSNL can spill over to Q2, which might be better for TCS," said Pathak.
While TCS does not offer revenue guidance, its management said business from clients based abroad would be better than last year. 'The only thing that's a bottleneck at this time is a certain amount of lack of clarity in the market. So, once that lifts, we believe that the spend should come back," said Krithivasan.
Echoes from Accenture
The management echoed the views that larger peer Accenture Plc expressed last month. Accenture chair and CEO Julie Sweet said its clients were facing multiple challenges at once, and the company continues 'to see a significantly elevated level of uncertainty in the global economic and geopolitical environment as compared to calendar year 2024."
This also means homegrown IT service providers, who announce their earnings next week, will be faced with similar challenges during the year.
For TCS, slow growth last quarter comes after it ended the last fiscal year with its slowest revenue growth in four years, raising questions on the company's growth strategy in a challenging macroeconomic environment.
However, there was a bright spot, as net profit rose 5.3% sequentially to $1.49 billion, its fastest net profit growth in at least a decade, aided by lower costs on equipment and software in the quarter and income tax refunds.
While the company's operating margin of 24.5% was up 30 basis points from the previous quarter, there is an underlying concern here.
Payhike pause
TCS typically starts the year with relatively low operating margins, which then increase through the year. But this time around, its margins have not taken a hit, as it has not announced the date and quantum of wage hikes to employees. Traditionally, the company rolls out hikes in the first quarter of the fiscal and most of its impact is absorbed in the months before September.
Chief human resources officer Milind Lakkad said no decision had been taken on wage hikes thus far. Interestingly, attrition rose to 13.8%, the highest since the three months ended September 2023.
The company added 5,090 employees during the quarter to end with 613,069 employees. Headcount is a key determinant of the demand environment in the IT services industry. More hiring or increased headcount signals higher demand for tech services, whereas a cut in headcount implies lower demand and lower business for software service providers.
However, a demand slowdown accentuated by US President Donald Trump's tariff wars might not bode well for TCS. This demand uncertainty, as highlighted by Krithivasan, is causing Fortune 500 companies to pull back tech spending, as their focus shifts to sourcing raw materials at reasonable prices to run their primary business.
Client caution
'In some places, we find the decisions where we thought a transformation project, a decision would be taken within this quarter, so that we can start the project, those decisions got delayed, where the clients are not clear about the return on investment on those projects," said Krithivasan.
A double whammy comes in the form of Gen AI, which threatens to eat into the work of IT outsourcers as the technology can automate many human tasks. TCS does not specify revenue or orders from Gen AI unlike its larger peer Accenture, which has won $7.1 billion in total orders from gen AI since September 2023.
TCS also announced a dividend of ₹11 per share.
The company's shares fell 2.05% to close at ₹3,382.30 on Thursday. The 30-share benchmark BSE Sensex index closed 0.41% lower at 83,190 points. The earnings were announced after market hours.