Tata Consultancy Services’ (TCS) has recorded an all-time high overall deal pipeline, yet its order book for quarter ended September 30 saw no mega deals, and in fcat declined by over 23.2 percent year-on-year to $8.6 billion.
The management of TCS guided for a delayed growth recovery, by Q4FY25, with some green shoots visible right now. On a half-yearly basis as well, Total Contract Value (TCV) of deals was down 20 percent YoY.
TCS' Deal Picture
“TCS indicated that the base year had a few mega deals which were absent in H1FY25. With the BSNL deal coming to an end in FY25 (unless there is a follow-on deal immediately) current consensus expectations on growth for FY26 requires a strong H2 on the TCV front,” said a Bank of Baroda (BoB) Capital report.
“Not sure whether the lack of mega deals is an industry problem or a TCS specific one. TCS also talked about elongation of deal closure timelines. Maybe this is ‘wait and watch’ in the evolving political situation in the US,” the BoB Capital report added.
A Nomura report said the discretionary demand is unlikely to worsen further. “The onset of interest rate-cutting cycle and a potential thaw in decision-making by US corporates post US elections in Nov 2024 could provide fillip to demand, in our view… We note that growth acceleration in FY26F hinges on an improvement in deal wins.”
The US Federal Reserve had cut its interest rate by 50 bps in September, in a first such move in four years. Since it’s a recent event the impact is yet to reflect on client conversations around technology budgets for calendar year 2025.
Moneycontrol PRO research said TCS expects a good holiday season in the US to improve discretionary spending, which can also bring back a lot of technology spending in retail.
Given the amount of work kept on hold so far due to an uncertain macro, TCS has reasons to be optimistic on demand recovery beyond a soft Q3FY25.
As of Q2, BFSI, which accounts for 35-40 percent of TCS’ revenue has shown signs of recovery for the second consecutive quarter. There were several deal wins from the retail sector too, from customers like Primark, McDonald’s and Croma, to name a few.
Though a significant chunk of the India revenue growth in Q2 came from the ongoing BSNL deal, there were client-specific issues in healthcare and life sciences in North America and in the UK. The BSNL deal is expected to be completed by the end of FY25, beyond that it will go into maintenance mode. Whether TCS will be able to replace this with another mega deal will be watched out.
Dealbook Outlook
According to TCS CEO and MD K Krithivasan, TCVs always have some “lumpiness” and deals which were expected to close last quarter sometimes gets pushed to the subsequent quarters. He explained that Q2FY24’s TCV won’t be comparable this fiscal, as there were two mega deals back then.
TCS has guided for a quarterly TCV range of $7-9 billion.
“If you were comparing with last year, in Q2 itself, we had mega deals amounting to almost $2 billion. So in the absence of those mega deals, I think it's a comfortable number ($7-9 billion range),” Krithivasan said at the post earnings analyst call.
He added, “From a pipeline perspective, actually, our pipeline is nearly at an all-time high and both, what we call a qualified pipeline and the overall pipeline. The pipeline is also across all geographies and industries. So pipeline is looking strong.”
Krithivasan said that while the TCV is in comfort range, it has shown sign of improvement as well.
Green Shoots
Going by the current events, TCS maintained that the demand environment had remained the same as Q1FY25, with clients focusing on cost optimisation and RoI-driven deals.
“The management remains optimistic on discretionary spends recovery aided by lower inflation, interest rate cuts, modernization backlog at enterprises and increasing consumer experience spends,” said a Nomura note on TCS.
“The company saw no change in the demand environment from the previous quarter other than a few clients’ specific issues in the Lifesciences and Manufacturing vertical which are expected to stabilise in Q3, as clients still keep their focus on cost optimisation and ROI driven deals,” Nomura's report added.
AI Deals
On the generative AI/ AI front, the company had doubled its TCV in Q2. It reported 600 Gen AI/AI engagements as compared to 270 in Q1. Additionally, in Q2 about 86 such engagements have gone into production from proof of concept stages as compared to only eight in the last quarter.
However, while the Gen AI deal sizes still continue to remain smaller, Krithivasan shared that it is now in the ranges of $10-30 million, based on the tenure of the deal and size of the organization. This is a sign of maturation as compared to sub $1 million Gen AI/ AI deal sizes in the past quarters.
TCS didn’t disclose the revenue figures expected from these 600 AI-led engagements.
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