India's TCS marginally beats second-quarter revenue view as AI demand grows

Tata Consultancy Services reported September-quarter revenue that slightly beat expectations on Thursday, as AI-led demand and growth in its banking vertical helped India’s largest software services provider.

AI is disrupting India’s $315 billion IT services sector by undermining the billable hour business model, but is also creating new demand as clients buy services being built on the technology. Companies are ramping up investments to capture this emerging demand and cushion the hit to their core business.

“Revenue growth is in line with expectations but operating margin was slightly lower,” said Anshul Jethi, analyst at LKP Securities.

TCS’s annualised AI revenue rose to $3.1 billion in the September quarter from $2.6 billion in the previous quarter.

The other Indian IT companies will also start reporting that AI’s percentage share in total revenue is in double digits, Jethi added.

TCS’ consolidated revenue rose 11.2% to 731.88 billion rupees ($7.57 billion) year-on-year in the second quarter of the fiscal year. Analysts, on average, expected revenue to come in at 731.48 billion rupees, per data compiled by LSEG.

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However, sequential revenue growth for TCS excluding currency fluctuations, at 0.5%, was the lowest in three years for the July-September quarter.

Quarterly net profit for TCS rose 15% to 138.84 billion rupees, compared with analysts’ mean estimate of 137.97 billion rupees.

Deal wins for the quarter stood at $9.6 billion, up from $9.5 billion in the preceding quarter and $10 billion in the same period last year. The operating margin fell 120 basis points to 24.2% due to higher wages.

Revenue from the company’s banking and financial services vertical, which makes up one-third of its revenue, grew 3.9% from last year, excluding currency fluctuations.

TCS is part of the salt-to-software Tata Group, which is caught in a power struggle over control of holding company Tata Sons and whether it should go public.

The Tata Group firm is the first major Indian IT company to report numbers in the current earnings cycle. Smaller rivals Infosys, HCLTech, Wipro and Tech Mahindra will report in the coming weeks.

Larger rival Accenture forecast strong annual growth last week, as clients booked more work and signed deals converted into revenue at a faster pace, a positive signal for Indian IT firms.