TCS Q1FY25 earnings: Five factors to watch for

TCS is expected to deliver a modest sequential growth in revenue of 1.6 percent, driven by a ramping up of large deals including cost takeout ones, or those that involve reducing costs for clients.  According to analysts at Kotak Institutional Equities (KIE), this will include an estimated $150 million from a $1.8 billion deal with the state-owned Bharat Sanchar Nigam Limited.

The quarter is also expected to see weak revenue in the financial services and telecom verticals. There will be an impact of cross-currency headwinds too.

The company's EBIT (earnings before interest and taxes, or operating) margin is likely see a decline of 130 basis points over the previous quarter, especially as it rolled out wage hikes during the April-June period, according to Moneycontrol’s poll average of 11 brokerage firms.

“We expect EBIT margins to be impacted by 200bps QoQ on wage hikes (double-digit for top performers); offset partially by utilization improvement, pyramid optimisation, and other productivity benefits. Sub-contracting cost has bottomed out in FY24,” an ICICI Securities report said.

Wage hikes

During Q4 earnings conference call in April, TCS had announced annual increments in the range of 4.5-7 percent with double-digit hikes in pay for top performers starting from April 1.

Last year, ‘exceptional’ performers got 12-15 percent salary hikes.

The impact of the current wage hike cycle is expected to reflect on the margins. Interestingly, for the first time in 19 years, TCS’ headcount in the fourth quarter declined by 13,249 on an annualised basis.

Demand outlook

While TCS in the three months to March reported an all-time high quarterly order book of $13.2 billion, Q1 was subdued in comparison.

Some of the deals signed during this quarter were a generative AI and cloud transformation deal with Xerox, a GenAI partnership with Amazon Web Services and a BFSI deal with Burgan Bank, to name a few.

“We expect $11- 12 billion of deal wins, driven by a high rate of closures of cost takeout deals. Renewal component in deals will be higher, in our view. Focus will be on TCS’s ability to leverage its strengths in 'Run' spends and outperform on revenue growth in FY2025E,” the KIE report said.

The street will keep a close eye on the management commentary around discretionary spending coming back and outlook on how demand will pan out in FY25. Focus will also be on BFSI recovery, and demand in North America, UK and Europe.

According to analysts, the worst is over for discretionary spending delays and clients are slowly getting on track with their technology budgets, though they still remain wary.

Generative AI pipeline

GenAI has become an important driver for IT firms in recent times as discretionary spend remained elusive.

After Accenture, TCS was the only IT major to share its GenAI deal pipeline numbers. As of Q4, TCS’ Gen AI pipeline had doubled to $900 million with over 200 active engagements.

Last month, Accenture reported that its Gen AI bookings were worth over $900 million in the second quarter. This takes the total GenAI bookings to $2 billion for the fiscal year to date.

TCS being a close competitor that has started calling out its GenAI deal pipeline, the results announcement will be a watched event for any new updates.

Hiring plans

TCS CEO and managing director K Krithivasan has already indicated that the company will be adding around 40,000 freshers in FY25, similar to what it had hired in the previous fiscal year. But the sector overall has been marred by both fresher and lateral hiring delays.

IT companies have been hiring in a controlled manner since FY24, aiming to improve utilisation rates as demand has remained hard to come by amidst macroeconomic uncertainty.

According to analysts, lateral hiring in FY25 will be driven by niche skills in areas like AI, cloud computing and cybersecurity.

As hiring trends are closely linked to the demand expected in the IT services sector, TCS’ hiring plans for FY25 will be closely tracked by shareholders.