The July-September results of Tata Consultancy Services (TCS) and HCLTech highlight a delayed recovery outlook for the IT services sector. According to analysts, continued weakness in discretionary spending, client-specific challenges, and slower decision-making, influenced by global macroeconomic uncertainties, continue to plague the sector.
Axis Securities said in a report on Tuesday that while the long-term demand scenario for the IT sector remains strong, the near-term demand remains uncertain, leading to ambiguity around growth momentum in the immediate future.
“The demand environment is uncertain because of the potential threat of recession from the world’s largest economies. The rising subcontracting cost and cross-currency headwinds may impact operating margins negatively,” the brokerage said.
The same assumes significance as many analysts had banked on a fast paced demand recovery for IT services post the US Federal Reserves interest rate cut.
“We saw the cautious trends of the last few quarters continue to play out in this quarter as well,” TCS’s CEO K Krithivasan had said after the company’s earnings. He had also noted that globally, clients are prioritising efficiency through cost transformation programmes, with subdued demand for discretionary deals with low immediate return on investment.
On similar lines, HCLTech’s CEO, C Vijayakumar, said on Monday: “We see good demand in financial services, that’s also extending to other verticals, but we are a little cautious about extrapolating this for a longer period of time. We are going to take it one quarter at a time”.
In the quarter ended September, TCS reported consolidated revenue growth of 2.6% to reach Rs 64,259 crore, surpassing Street estimates, but its net profit declined by 1% quarter-on-quarter to Rs 11,909 crore.
An Emkay report on TCS following its results noted, “We cut earnings estimates by 1.2-2.4% for FY25-27 considering the Q2 miss. Weak discretionary spending, client-specific challenges, slower decision-making, and clients’ cautious behaviour amid macro uncertainties weighed on revenue growth”.
Meanwhile, HCLTech’s consolidated revenue rose to Rs 28,862 crore in July-September against Rs 28,057 crore reported in the previous quarter. The bottomline, however, fell to Rs 4,237 crore in the September quarter against Rs 4,259 crore reported in the June quarter due to an expense linked to State Street divestment.
Deal Wins and vertical performance
For TCS, the total contract value (TCV) rose to $8.6 billion in Q2, an increase from $8.3 billion in the previous quarter. Krithivasan stated, “TCV always has some lumpiness… And in the absence of those mega deals, I think it’s a comfortable number, with our pipeline being nearly at an all-time high”.
HCLTech saw a sequential increase in deal wins taking the total contract value to $2.22 billion against $1.96 billion reported in the June quarter. “In terms of booking, we won 12 deals from services and eight deals from software bringing the total to 20 deals in Q2,” Vijaykumar said.
On the vertical front, both TCS and HCLTech experienced a sequential decline in revenue from its financial services segment, but both said they have started to see green shoots from the sector.
HCLTech’s performance from Americas region also fell 90 bps sequentially in the September quarter, whereas those from Europe rose 50 bps. Sales from rest of the world rose 40 bps.
“Our rest of the world business clocked in a strong sequential growth of 7.2% in constant currency which was largely driven by our financial services and manufacturing businesses,” Vijaykumar said.
Impact of Generative AI for TCS and HCLTech
TCS has shown strong traction in the generative AI (GenAI) space, with 600 AI or GenAI engagements in various stages, including 80 in production.
The company revealed that it had $1.5 billion worth of AI/GenAI deals in its pipeline as of the June quarter. “We are seeing continued momentum in AI/GenAI adoption, with the underlying technology gaining maturity at a very rapid pace,” TCS stated in its press release.
On the other hand, HCLTech’s CEO, C Vijayakumar, noted that the company’s approach to GenAI is measured, stating that the technology’s spend will depend on its integration within broader modernisation programmes rather than standalone projects.
“GenAI deal sizes are not relevant at present because the technology’s spend will be measured based on its use cases as an enabler of larger modernisation programmes,” he said.
From: financialexpress
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