The Indian information technology (IT) sector, long regarded as a pillar of the country’s economic growth, has suffered substantial headwinds in the last two years. This industry comprises software services, business process outsourcing, and hardware manufacturing, which has significantly declined following years of strong performance.
However, with the recovery of IT services, the industry is well-positioned to resume its growth path. One such company in this category that appears to be leading the pack from the front is none other than the industry’s behemoth, TCS (Tata Consultancy Services).
Industry Outlook
The IT sector in India is navigating a challenging period marked by global economic uncertainty, talent shortages, and margin pressures. Despite recent underperformance, the industry shows signs of revival. Companies are adapting to new technologies like AI, cloud computing, and automation, while also dealing with shifts in client demands and spending patterns.
The BFSI crisis and changing technology trends have forced IT firms to evolve their strategies. However, increasing digital adoption across industries offers new growth opportunities. While the sector may not immediately return to its previous high growth rates, there’s cautious optimism for a gradual recovery. Success will depend on effectively managing ongoing challenges while capitalizing on emerging technologies and market demands.
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Company Overview Of TCS
Tata Consultancy Services is the largest IT services provider in India, and it is a global leader in the field and operates in 55 countries. TCS provides a wide range of services, such as application development, business process outsourcing, and consulting. The company has strong financial results, steady revenue growth, and industry-leading profit margins.
TCS is renowned for its highly skilled workforce, commitment to innovation in fields like artificial intelligence and cloud computing, and long-standing relationships with numerous Fortune 500 clients. TCS also keeps up with changing market trends and emerging technologies.
Human Resource Management
As of Q1 FY25, TCS had 606,998 total employees. With 151 different countries represented among its staff of 35.5% women, the corporation maintains a diversified workforce. In the IT services sector, TCS reports a low attrition rate of 12.1% (LTM). The organization places a strong emphasis on developing its workforce; as of FY25, employees have accrued 11 million learning hours.
In the same time frame, TCS workers also gained 1.2 million competencies and 129,000 high-demand competencies. These numbers demonstrate TCS’s dedication to preserving a knowledgeable and varied workforce while successfully controlling turnover.
Slow Down in the IT sector
TCS, like other IT companies, has experienced a slowdown due to:
- Global economic uncertainty: Geopolitical tensions and recession fears in key markets like the US and Europe have led to cautious IT spending, resulting in delayed projects and reduced budgets.
- BFSI sector challenges: Recent banking sector turmoil has caused hesitation in IT spending within financial services, impacting TCS’s revenue from this crucial segment.
- Talent management issues: A shortage of skilled professionals in emerging technologies has increased competition for talent, driving up costs and potentially affecting project delivery.
- Shifting technology trends: The rapid evolution of technologies like cloud computing, AI, and automation has forced TCS to adapt quickly, potentially straining resources and affecting short-term growth.
- Changing client expectations: Clients are increasingly demanding value-driven, outcome-based engagements, requiring TCS to adjust its service models and pricing strategies.
Financial Highlights Of TCS
Revenue increased steadily, rising by 5.4% from ₹59,381 Crores in June 2023 to ₹62,613 Crores in June 2024. Net profit also grew, improving by 9% from ₹11,120 Crores to ₹12,105 Crores over the same period.
Operating profit margin remained relatively stable, fluctuating between 25% and 28% over the five quarters, ending at 27% in June 2024. Operating profit showed consistent growth, increasing from ₹13,755 Crores to ₹15,442 Crores, a 12.3% rise.
Earnings per share also demonstrated growth, rising from ₹30.26 in June 2023 to ₹33.28 in June 2024, representing a 10% increase over the one-year period.
Result Outlook and Management Commentary
On July 11, Tata Consultancy Services (TCS) published its June quarter results, which met market expectations. The tech company announced a 9% increase in consolidated net profit to ₹12,040 crore from the previous year. In the period between April and June, India’s largest IT company’s revenue from operations increased by 5.4 percent to ₹62,613 crore year on year. The company also issued an interim dividend of ₹10 per share.
A filing with the stock exchanges revealed that TCS has observed that all of its major markets have resumed sequential growth. The company also reported that nearly all verticals experienced sequential growth, with manufacturing leading the way at 9.4% year-over-year growth, followed by energy, resources & utilities at 5.7%, and Life Sciences & Healthcare at 4.0%. Emerging markets, in particular, saw a robust double-digit growth, nearly reaching 62% year-over-year.
Competitors
TCS faces stiff competition from major Indian IT firms like Infosys, Wipro, HCL Technologies, and Tech Mahindra. Infosys, the second-largest Indian IT company, is known for its innovative solutions and strong presence in North America and Europe.
Wipro excels in digital transformation and cybersecurity, while HCL Technologies has a strong focus on engineering and R&D services. Tech Mahindra specializes in digital transformation and consulting, with a strong foothold in the telecom sector.
TCS also contends with mid-sized firms like Coforge, Birlasoft, and Persistent Systems, which are gaining traction in specific sectors and niche technologies.
These mid-sized companies offer specialized services in areas like insurance, manufacturing, and software product development, presenting additional competition in certain market segments. This diverse competitive landscape challenges TCS to continually innovate and maintain its market leadership.
Key Metrics of Top IT Companies
Total Contract Value of TCS
Over the past five quarters, TCS has experienced significant fluctuations in its Total Contract Value (TCV). In Q1 2024, TCS reported a robust TCV of $34.10 billion (All Time High Deal Wins), setting a high benchmark. However, subsequent quarters saw a substantial decline. Q2 2024 recorded $11.20 billion, a 67.2% decrease from Q1.
The downward trend continued in Q3 2024 with $8.10 billion, marking a 27.7% drop from Q2. Q4 2024 showed signs of recovery with $13.20 billion, a 63% increase from Q3. The most recent quarter, Q1 2025, reported $8.30 billion, representing a 37.1% decrease from Q4 2024 and a dramatic 75.7% decline from the same quarter last year. This volatility in TCV reflects the challenging and dynamic market conditions TCS has been navigating.
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What lies ahead for TCS after Q1 results?
- Digital transformation: As businesses worldwide accelerate their digital initiatives post-pandemic, TCS is well-positioned to capitalize on this trend. The company can leverage its expertise to help clients modernize their operations and enhance digital capabilities.
- Cloud migration: With more companies moving to cloud-based solutions, TCS has significant opportunities to grow its cloud services. This includes assisting clients with cloud migration, management, and optimization across various platforms.
- AI and automation: TCS’s ongoing investments in artificial intelligence and automation technologies will be crucial. These areas are becoming increasingly important for clients, offering opportunities for TCS to develop innovative solutions and maintain its competitive edge.
- Talent management: Addressing the IT skills gap and reducing attrition rates will be vital for TCS. The company needs to focus on retraining and upskilling its workforce to meet evolving client needs and maintain project continuity.
- Global economic factors: TCS is navigating various global economic challenges, including geopolitical tensions and potential recessions in key markets. The company’s ability to adapt to these uncertainties will impact its performance and growth.
- Client expectations: There’s a shift towards more value-driven, outcome-based engagements. TCS is changing its service models and delivery approaches to meet these changing client expectations and maintain strong relationships.
- Cost management: In a competitive market with margin pressures, TCS is focusing on effective cost control. This involves optimizing operations, improving efficiency, and balancing investments in new technologies with profitability.
Tata Consultancy Services (TCS) Share Price Target
KR Choksey: The brokerage gave a price target of 4587 with a “BUY” recommendation on the stock as the brokerage is of the view that the sector is back on a growth path.
Motilal Oswal: also has a “BUY” rating on the stock with targets of up to Rs. 4600+. The brokerage feels going forward, scale-up by BSNL and growth of revenue in the North American market would aid the company in expanding its revenue and profitability.
Emkay Global: has given a “SELL” recommendation on the stock because, though the revenue of the company has gone up, the majority of it was contributed by BSNL. Almost half of the growth in revenue YoY.
Conclusion
Despite industry-wide problems, TCS demonstrates resilience and promise for growth. The company’s above-average performance in Q1 FY25, which included improved net profit and revenue, demonstrates its ability to navigate market uncertainty. TCS’s emphasis on digital transformation, cloud services, artificial intelligence, and automation prepares it well for future opportunities.
However, the organization must continue to handle talent management concerns and adapt to evolving client demands. While some analysts are positive about TCS’s future, others are more concerned. Overall, TCS’s future outlook appears cautiously optimistic, depending on its ability to properly exploit upcoming technology and manage global economic variables.
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