Tata Consultancy Services‘ June-quarter performance suggests the recovery in technology spending is likely to remain gradual rather than broad-based, with analysts pointing to sustained strength in banking and financial services but persistent weakness in consumer-facing industries and discretionary spending.
The company’s management struck an optimistic tone on client conversations and deal activity, particularly in banking, financial services and insurance (BFSI), technology and manufacturing.
However, analysts remained cautious on the pace of recovery. “TCS expects demand to improve in Q2… While we also expect Q2 to be better, we believe evidence around demand improvement is scant,” analysts from Motilal Oswal said.
They added that while the narrative around pent-up demand has persisted for some time, geopolitics, tariff uncertainty and cautious discretionary spending continue to weigh on decision-making. “We continue to expect FY27 demand to remain muted. Commentary, however, is better than we expected,” the analysts mentioned above said.
Analysts from BOBCaps echoed the view. “TCS sounded positive on Q2 based on revival in some verticals and pent-up demand. We stay cautious and expect flat QoQ revenue,” they said.
ICICI Direct also said that broad-based growth remained absent, with growth remaining concentrated in select verticals and regional markets. JM Financial urged caution, noting that while the quarter was largely in line with expectations, demand recovery should be monitored, despite management expecting overall demand to improve during the second quarter.
Generative AI Paradox
Analysts agreed that artificial intelligence (AI) continues to drive transformation programmes, larger deal wins and new revenue opportunities, but it also starting to create pricing pressure on existing contracts.
“The company did acknowledge AI-led deflation on its book of business but also mentioned that this is being mitigated through allocation of more business from clients, resulting in positive revenue growth,” Elara Capital said.
Brokerages also said that the impact of AI on pricing was likely to intensify. “We believe the full impact of AI deflation is still unfolding, and productivity gains are likely to continue getting passed on to clients over the coming quarters, keeping pressure on the existing book of business,” analysts from Motilal Oswal said.
ICICI Direct, however, said AI is also creating incremental opportunities. Management indicated that 10-15% productivity gains passed onto clients are largely being offset by incremental transformation opportunities, suggesting that AI adoption is translating into fresh deal wins rather than eroding margins, the brokerage said.
Margin Compressors
Analysts largely viewed the 130-basis-point decline in operating margin as a temporary impact of annual wage hikes rather than a deterioration in operating performance. “Despite the near-term margin pressure, TCS reiterated its focus on balancing growth investments with operating discipline and expects margins to improve through the year, with an aspiration to exit FY27 at 25%,” Elara Capital said.
The consensus among analysts is that the key test for TCS over the coming quarters will not be margins, but whether stronger client conversations, AI-led transformation programmes and a healthy deal pipeline translate into sustained topline growth across a broader set of industry verticals.
Shares of TCS rose 4.11% on the BSE to an intraday high of Rs 2,109.995 on Friday, before paring some gains to close at Rs 2,069.05, up 1.05% from the previous day’s close. The company had declared its June quarter earnings after market hours on Thursday.