However, experts see opportunities for a demand uptick, deal consolidation, digital transformation projects, and artificial intelligence moving into the production stage, indicating that 2025 will be better than the previous year for the Tata Group company with an annual revenue of $29 billion.
CEO K Krithivasan has stabilised the ship in a tough market since taking charge more than a year and a half ago, analysts say. He will now need to perform on reversing revenue erosion from account rampdowns, including its 4G network deal with state-run Bharat Sanchar Nigam Ltd (BSNL) in India, its fastest growing market.
TCS’s quarterly growth relied heavily on emerging markets such as India, as most of its core markets continued to remain muted despite initial signs of a revival.
ETtech“While TCS guided for higher international growth in CY25, overall growth may now slow due to the BSNL rampdown. TCS suggested a better discretionary demand environment, though not across the business. It also noted shorter deal cycles, signalling improved decision making, which is encouraging,” said Yugal Joshi, partner, Everest Group.
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The BSNL project is 70% complete and TCS expects it to start tapering off from the ongoing January-March period, the fourth quarter of fiscal 2025.
Slowdown mode
Last month, the Tata subsidiary notably reported its slowest fiscal third-quarter sequential growth in several years, with nearly flat revenue at $7.54 billion. From a year earlier, revenue rose 3.6% and profit increased 2.6% on-quarter to $1.46 billion. Its year-on-year organic revenue growth in constant currency at 4.5% in the past quarter was in line with market estimates, but slower than 5.5% from the prior quarter.
“Particularly concerning was the performance of its international (ex-India) business, where growth slowed for the second consecutive quarter to 0.2%,” Joshi said.
The quarter showed that large deals broken into smaller sizes are being chased by mid-tier peers as well, with some revenue share also being lost to global capability centres (GCCs) that its clients have set up in India. Talent fight and plateauing international growth amid softening revenue also remain major risks.
ETtechAn encouraging metric was a 26% year-on-year jump in deal bookings at $10.8 billion, with “significant large deal wins”. “This performance is particularly noteworthy given the absence of any mega deal wins. Our strong deal pipeline and TCV (total contract value) give us confidence as we look ahead,” Krithivasan said on a post-results conference call.
What’s next?
In an interview with ET last month, Krithivasan had said that mega deals take longer to close, and so, one cannot say when it will be back on the table. “But there are large deals being discussed,” he added. The number of the company’s $100-million-plus clients increased by three to 64 in the past quarter from a year ago. But experts feel the momentum needs to be sustained.
Joshi believes the key challenge for TCS is to reignite its consulting and advisory business and also deepen partnerships with next-level technology vendors. He said this will be critical for its growth in 2025 and beyond. “2025 is all about deal consolidation. SaaS (software-as-a-service) vendors and hyperscalers (Google Cloud, Amazon Web Services and Microsoft Azure) have consumed much of the IT op-ex (operating expenditure) budget and that means growth will be gained at competitors’ expense,” said Ray Wang, principal analyst, founder and chairman of Silicon Valley-based Constellation Research.
Insiders at TCS said that while the demand environment has been the same for the past six months, certainty around the new US regime and easing of the interest rate cycle has begun to see clients loosening their spending budgets. These are in the financial services and healthcare sectors, which are expected to return to growth in the ongoing quarter, and in the supply chain transformation space, where investments are required to implement the latest technologies.
Factors at play
The TCS management has said that it expects the retail and manufacturing verticals to bottom out in the January-March quarter, with the life sciences and healthcare verticals recovery contingent on policy clarity. The top brass expects some spill over of furloughs over the first two weeks of January 2025, slowing the recovery in the quarter. Krithivasan, meanwhile, emphasised that the demand pickup was still showing only early signs.
Another TCS executive said: “Given the scale and size of TCS, we are better equipped to handle the changes despite growing competition. Our existing relationships, offerings and strength of data can deliver quality at scale.”
Last year, after the July-September results, an Emkay report cut its estimate on TCS’s earnings by 1.2-2.4% for FY25-27. Last year too had started with hopes of a recovery, led by pent-up demand, but TCS’s FY25 growth was “largely underwhelming”, BNP Paribas said in a report, adding: “However, this time, valuation is in its favour.”
Heading into FY26, TCS should benefit from the overall demand recovery, helped by its large-scale and broad-based capabilities, the report said. TCS has also led the margin growth among the top-tier IT firms at 24.5%, supported by a consistent improvement in productivity, utilisation and adjustment of workforce structure.
For the ongoing quarter, the company is confident of expanding margin as its BSNL deal rolls off by end-March. Expansion will continue with pyramid rationalisation, productivity gains and better utilisation as key levers, most estimates suggest.
Challenges ahead
Wang sees challenges coming from a highly competitive market for big deals and a lot of competition with GCCs being set up by MNCs to insource technology and other services. “While captives (GCCs) are hot now, the majors must wait them out for three years when they will be gaining traction. However, right now, TCS is competing with captives and the captives are winning,” Wang said.
The past 18 months have been tough for the $254-billion outsourcing industry, though companies have started talking about the emergence of green shoots in the last two quarters. Most IT chiefs maintain cautious optimism even as they manoeuvre AI’s technological disruption.
“Clients are expecting AI to deliver exponential efficiency and if you are not helping a client drive costs down or drive revenue up, there is no incentive to switch,” Wang said.
He added: “We believe that midsized tech firms may be poised to scale out better. Why? AI is replacing 4x to 5x current jobs and size and scale will no longer need to be about human labour. The goal is how to grow out digital labour at scale.” Hence, despite being a market leader, TCS with a 700,000-strong workforce will have to fight it hard, experts unanimously agree.
In the past quarter, TCS’s headcount shrank by more than 5,300, despite signs of a business revival, amid productivity and utilisation gains. With discretionary demand picking up, the outsourcing giant has projected fresher recruitment in FY26 to be more than the FY25 target of 40,000. Analysts expect most IT service providers, including TCS, to deliver 20-40% productivity benefits across functions with generative AI adoption.
Krithivasan highlighted that Gen AI, AI and cloud services continued to see significant growth for the company in the past quarter. And agentic AI represents the next step of maturity in the exponentially evolving space of AI.
“We are now starting to go past the initial wave of chatbots and RAG (retrieval-augmented generation) deployments of Gen AI, and more crucially, this will allow TCS to use our deep contextual knowledge of our customers’ business to design, train and deploy agents that solve high-value business problems,” Krithivasan told analysts.
Wang, meanwhile, said Krithivasan will have to “reimagine an AI-first TCS and what it means across the entire business model”.
