TCS Q1 results: Net profit up 8.7%, margins rise despite salary hike

India’s largest IT services company Tata Consultancy Services (TCS) marginally beat Bloomberg estimates for its first-quarter (Q1) of 2024-25 performance, but macroeconomic uncertainties continued to weigh on the management’s demand outlook.

For Q1, TCS net profit grew 8.7 per cent year-on-year (Y-o-Y) to Rs 12,040 crore, but fell 3.1 per cent sequentially. Revenue increased 5.4 per cent Y-o-Y and 2.2 per cent sequentially to Rs 62,613 crore. Bloomberg had estimated revenue to be at Rs 62,128 crore and profit at Rs 11,959 crore.

Margins for the quarter were 24.7 per cent, a 1.5 per cent Y-o-Y increase. This was a surprise for many considering the company announced a salary hike during the first quarter.

K Krithivasan, chief executive officer and managing director of TCS, maintained that FY25 would be better than FY24, but said to call out on growth trends or green shoots was still too early.

“We still believe that it’s too early to call whether the growth momentum is sustainable because the market conditions continue to remain the same as it was last quarter,” said Krithivasan in the media briefing.

This uncertainty was evident in the total contract value (TCV) signed during the quarter. TCS signed $8.3 billion TCVs, down 18.6 per cent Y-o-Y and 37 per cent sequentially. In Q4FY24, TCS had signed TCVs worth $13.2 billion, the highest in the past four-five quarters.

Krithivasan said the firm’s comfort zone for TCVs was between $7 billion and $9 billion for FY25. “Order book sometimes tend to be lumpy, but what gives us confidence is the overall pipeline. Our qualified and total pipeline continues to be at an all-time high,” said Krithivasan.

In terms of the growth driver, emerging markets, especially India, Latin America, and MEA, outperformed the US. India grew 61.8 per cent Y-o-Y primarily due to the BSNL deal, followed by the UK deal at 6 per cent.

While the US market continued to be subdued, North America was down 1.1 per cent and Continental Europe grew 0.9 per cent. The company, however, said all major markets were back to sequential growth.

In verticals, the banking, finance, and insurance sector, the largest for TCS, was down 0.9 per cent Y-o-Y but improved 1.3 per cent sequentially. Communications, media, and technology grew 4.8 per cent sequentially.

What really worked in favour of TCS was the firm, after three straight quarters of headcount decline, added more than 5,000 employees and onboarded 11,000 freshers. The second positive was margin expansion of 1.7 per cent Y-o-Y despite salary hikes.

Samir Seksaria, TCS’ chief financial officer, said: “In spite of the usual impact of the annual wage increments in this quarter, we have delivered strong operating margin performance, validating our efforts towards operational excellence. We remain focused on making the right investments in R&I and talent, strengthening our superior return ratios and creating long term value for our stakeholders.”

AI and generative AI continued to see growth momentum. “The total AI projects being executed at TCS across verticals is at 270. Our AI and GenAI pipeline has doubled in the quarter to $1.5 billion,” said Krithivasan. He, however, said these deals were still small in size and shorter duration.

Most of the analysts believe that TCS' strong performance was an indication towards a better year.

“The numbers augur well to improve the sentiments for IT stocks and expect positive rubs off on the overall sector. We have a Buy rating on the stock,” said Sanjeev Hota, head of research, Sharekhan by BNP Paribas.

Biswajit Maity, senior principal analyst at Gartner, said: “In light of the Gartner Forecast Analysis IT Spending, Worldwide report, and TCS’s strong business pipeline, we are optimistic about growth in the coming quarters.”

TCS’ workforce stood at 606,998 as on June 30. The firm also announced a net headcount addition of 5,452. This comes after three quarters of negative headcount. IT services attrition came in at 12.1 per cent.