On 2 April, US President Donald Trump imposed a range of tariffs on imports from several countries, triggering concerns of a worldwide tariff war. Analysts are worried that the world is on the cusp of a recession.
Any recession is bad news for IT services companies because when Fortune 500 companies hold back their spending, the revenue of Indian IT outsourcers takes a hit. The impact has had shareholders on their heels.
Shares of TCS, which declined 13.4% from 1 January to 1 April, have fallen 7.23% from 2 April to 8 April. This translates to a drop of 20.6% since the start of the year.
Kunchitham Krithivasan, the fifth chief executive officer of TCS in its 57 years, faces his biggest test – managing more than 600,000 employees at a time of macroeconomic uncertainty. A side of GenAI posing an existential dilemma to the country’s $283 billion IT industry, in addition to an already full plate of macroeconomic uncertainty, is a meal the TCS veteran will find tough to digest.
The Mumbai-based company could face a third related challenge in the form of client ramp-downs that have taken shape over the last fiscal.
It won’t be easy for Krithivasan to steer a behemoth like TCS, which gets almost $30 billion a year, or about $82 million a day. In this backdrop, Mint puts the spotlight on five important things to watch out for in TCS’s fourth-quarter earnings scheduled on 10 April.
1. Demand outlook
The first and foremost concern for the country’s largest IT outsourcer is the uncertain macroeconomic environment. While tariffs and counter-tariffs are not expected to directly impact IT outsourcers, clients including the world’s largest companies are expected to pull back their tech spending, which might lead to low demand for IT services and in turn, low revenue for TCS. More than 90% of the company’s revenue comes from clients abroad.
Such conditions might lead to a muted demand outlook by Krithivasan on Thursday. While TCS does not give out guidance on revenue, its outlook on global demand for tech services paves the way for other IT outsourcers, which will announce their full-year earnings later in the month.
2. Revenue growth
TCS, which ended FY24 with $29.1 billion in revenue, is facing the slowdown blues. Its revenue grew 4.1% year-on-year, the slowest pace in three years. Revenue in the first nine months of FY25 (April-December 2024), grew 4.6%. Added pressure from internal challenges like client ramp-downs does not give much reason to cheer.
“In FY2025E, TCS has had a string of challenges due to planned ramp-downs and unanticipated changes in sourcing strategy by clients,” Kotak Institutional Equities analysts Kawaljeet Saluja, Sathishkumar S and Vamshi Krishna said in a note dated 27 March.
This year, TCS is expected to lose $440 million in business from at least three clients – Postbank Systems AG, media rating firm NielsenIQ, and life insurance company Transamerica Life Insurance Co. Peer Wipro Ltd recently bagged a large deal from the Phoenix Group, one of TCS’s big accounts. This has led analysts to question TCS’s deal execution.
“TCS is known to defend its wallet share well, but a large competitor gaining a foothold in a strategic account may lead to a view of a dip in execution prowess and would be in focus in the upcoming results,” the Kotak analysts said.
Given that TCS doesn’t give guidance on revenue, analysts will look for clues that may hint at the company’s prospects.
3. Profitability
TCS’s operating margins will be an important metric as the company might defer salary hikes, or reduce them, if demand for business is low and less money flows into the company’s coffers.
TCS always follows a well-organised cycle where its profitability peaks at the end of the fiscal year. This is because TCS is the only major IT outsourcer to give salary hikes at the start of the fiscal. Most of the impact of the salary hikes is absorbed in the first six months of the fiscal – from April to September.
TCS’s operating margins of 24.5% are the highest among its peers including Infosys Ltd, HCL Technologies Ltd, and Wipro, which ended the three months through December 2024 with operating margins of 21.3%, 19.5%, and 17.5%, respectively.
4. Hiring plans
Lower demand for IT services leads to a reduced need for employees, be it from campuses or laterally. Add GenAI-led automation to the mix and it could be a double whammy for the company’s plans of adding headcount.
A forecast on fresher hiring plans for the year might be given by the company’s top brass during the earnings announcement. TCS added 5,808 employees in the first nine months of 2024, the most among the country’s top five after second-largest Infosys, which added 6,189 employees.
The company’s hiring requirements exceed those of its peers, considering its size in terms of employees. The tech services company had outlined a plan to hire 40,000 freshers by March 2025.
5. GenAI
GenAI threatens to eat into the work of IT outsourcers as the new technology can automate human tasks, reducing the dependency on humans for certain types of work.
TCS does not call out revenue through the new technology, but chairman Chandrasekaran has asked his generals to have a GenAI component in all its deals. Analysts and doomsayers have said that GenAI is eating up work related to customer support, application development and maintenance, businesses that make up about 40% of the company’s revenue.
This implies that $11.6 billion of TCS’s business is under threat from GenAI as clients will seek lower renewal rates for contracts as fewer people will be billed due to benefits derived from automation.
