Key highlights from Tata Consultancy Services Ltd (TCS) Q1 FY25 Earnings Concall
- Revenue Growth
- Q1 FY ’25 revenue grew 5.4% in rupee terms, 4.4% in constant currency, and 3.9% in dollar terms.
- markets returned to growth sequentially.
- Almost all verticals saw positive sequential growth, except for CMI.
- Dollar revenue reached $7,505 million.
- Growth attributed to ability to deliver large-scale, complex engagements and mission-critical services.
- Margin Performance
- Q1 operating margin was 24.7%, despite 170 basis points headwind from annual wage hikes.
- Net income margin in Q1 was 19.2%.
- EPS grew 10% year-over-year.
- Increased third-party expenses were offset by operating efficiencies.
- Improvements included better productivity, improved utilization, and reduced subcontractor expenses.
- Product Portfolio Updates
- Ignio cognitive automation software saw 24 deal wins and 10 go-lives.
- TCS BaNCS had five wins and 12 go-lives in financial services.
- BaNCS for insurance had one win and six go-lives.
- Quartz blockchain platform had one win and one go-live.
- TCS ADD platform in life sciences had two new wins and four go-lives.
- TCS iON administered exams for over 11.8 million candidates.
- Workforce Updates
- Total workforce at the end of Q1 was 606,998.
- TCS onboarded 11,000 trainees in the first quarter.
- Preferential induction will continue throughout the year.
- Attrition during the quarter was 5,452.
- Employees logged 11 million learning hours and acquired 1.2 million competencies.
- High performers received double-digit wage hikes, while others received 4.5% to 7% increases.
- LTM attrition in IT services was 12.1%, down 40 basis points sequentially.
- The company plans to build the largest AI-ready workforce through organic reskilling.
- Sector Growth
- Strong start to the fiscal year with growth across industries and markets.
- Total Contract Value (TCV) in Q1 was $8.3 billion.
- BFSI TCV was $2.7 billion.
- Consumer business group TCV was $1.1 billion.
- North America TCV stood at $4.6 billion.
- BFSI returned to sequential growth but declined 0.9% year-on-year.
- Consumer business group declined 0.3% year-on-year.
- Manufacturing grew 9.4% with broad-based growth across subsectors.
- Life sciences and healthcare grew 4%.
- Energy resources and utilities grew 5.7%.
- CMI (Communications, Media, and Information) declined 7.4%.
- Technology and services returned to sequential growth but declined 3.9% year-on-year.
- AI and Gen AI
- Over 270 AI and Gen AI engagements deployed or in progress.
- AI and Gen AI pipeline doubled to $1.5 billion in the quarter.
- The company is working on 270 AI/Gen AI projects.
- TCS launched AI WisdomNext platform to aggregate multiple Gen AI services.
- The platform offers modular components and industry-specific solution blueprints.
- Cloud, cybersecurity, and enterprise solutions led growth.
- Expanded partnerships in ER&D, utilities, and consumer process industry segments.
- Growth in cloud workload, endpoint security, threat intelligence, and cyberattack responsive services.
- Increased demand for IoT platforms and digital engineering capabilities across industries.
- Productivity gains from Gen AI vary between 5% to 25%, depending on the type of engagement and project phase.
- Software engineering projects typically see 5% to 20% productivity improvements.
- Testing projects may yield higher productivity gains.
- Geographic Performance
- Emerging markets showed superior and diversified growth.
- India led with 61.8% growth.
- Middle East and Africa grew 8.5%, Asia Pacific 7.6%, and Latin America 6.3%.
- United Kingdom led major markets with 6% growth.
- North America returned to sequential growth after five quarters.
- Europe grew 0.9%, with IT services remaining flat.
- Growth Expectations
- TCS expects fiscal year 2025 to be better than 2024.
- Growth has been broad-based across verticals and geographies.
- Lower TCV (Total Contract Value) is viewed as a timing issue rather than a concern.
- The company’s pipeline remains strong.
- Pricing Trends and Demand Visibility
- Overall pricing is generally stable.
- At a portfolio level, there are no material pricing changes to report.
- Realizations have been improving sequentially.
- TCS maintains that uncertainty in the market has not completely disappeared.
- Clients are still re-evaluating or ramping down programs at short notice.
- Demand outlook is heavily dependent on customers’ economic outlook.
- Margin Levers
- Subcontractor costs have likely bottomed out and are expected to remain stable.
- Short-term levers include pyramid optimization, productivity improvements, and utilization.
- Utilization still provides some opportunity for improvement despite significant progress last year.
- Project Renewal Trends
- Customers typically expect productivity improvements during project renewals.
- Clients often add more scope during renewals to maintain topline neutrality for TCS.
- Discussions about using Gen AI for productivity gains are occurring, but not yet widespread.
- Extreme or high-level productivity gains through Gen AI not commonly demanded by clients during renewals.
- Retail Sector Outlook
- Consumer confidence and inflation are key factors affecting the retail sector.
- Interest rates and overall consumer outlook influence sector performance.
- Improving macroeconomic conditions could act as tailwinds for the sector.
- Sustained growth requires consistent improvement in consumer confidence and controlled inflation.
- Manufacturing and Healthcare Sector
- Both sectors have performed well over the past three quarters.
- The automotive industry is being reshaped by the advent of EVs.
- Changes in spending priorities and investment focus are expected in these sectors.
- Vertical integration trends among OEMs may impact tier-one suppliers.
- The company remains cautiously optimistic about these sectors’ growth momentum.
- Deal Pipeline Trends
- Deal types include cost optimization and discretionary spending projects.
- Application modernization becoming more prominent in deal discussions.
- Cost optimization programs tend to have longer tenures.
- The average deal tenure is slowly decreasing at a global level.