Tata Consultancy Services Limited (TCS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the TCS Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nehal Shah from the Investor Relations team at TCS. Thank you, and over to you.

Thank you, Yesashri. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS's financial results for the first quarter of FY 2027 that ended on June 30, 2026. This call is being webcast through our website, and an archive, including the transcript, will be available on the site for the duration of this quarter. The financial statements, quarterly fact sheet and press releases are also available on our website. Our leadership team is present today on this call to discuss our results. We have with us today Mr. K. Krithivasan, Chief Executive Officer and Managing Director.

Hi. Good evening, everyone.

Ms. Aarthi Subramanian, Executive Director, President and Chief Operating Officer.

Good evening, everyone.

Mr. Samir Seksaria, Chief Financial Officer.

Hello, everyone.

And Mr. Deep Kunnumal, Chief HR Officer.

Hello, everyone.

Our management team will give a brief overview of the company's performance, followed by a Q&A session. As you are aware, we don't provide any specific revenue or earnings guidance. And anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks that the company faces. We have outlined these risks in the second slide of the quarterly fact sheet available on our website and e-mailed out to those who have subscribed to our mailing list. With that, I would like to turn the call over to Krithi.

Thank you, Nehal. Good day, everyone, and thank you for joining us. I would like to begin by calling out the key takeaways from our Q1 FY '27 performance. First, Q1 FY '27 reflects continued growth momentum on the strength of our strategic positioning, despite the geopolitical and macroeconomic headwinds. Our Q1 revenue stood at INR 72,275 crores, growing 2.2% sequentially and 13.9% year-on-year [indiscernible] consecutive quarter of growth. Growth was led by BFSI technology software and services, regional markets and products and platforms. Second, strong order book closure and large deal momentum continue. We delivered a TCV of $9.5 billion, including net new AI-led business transformation deals such as an $800 million mega deal with [ SKF], sixth mega deal win in the last 5 quarters, multimillion-dollar strategic partnership agreement with ServiceNow, a multimillion-dollar deal with Europe-based Fortune Global 50 firm. The third key takeaway is our AI services revenue continues to accelerate. At the end of Q1 FY '26, it stands at USD 2.6 billion in annualized revenue, which is up 13.6%. Fourth, client priorities are increasingly aligned, which are focus areas of AI-led transformation, modernization, cybersecurity, sovereign cloud, platform rationalization and vendor consolidation. We maintained healthy client additions across $10 million, $5 million plus and $1 million plus revenue bands on a sequential basis. Fifth, our operating margin stood at 24%, down 130 bps sequentially, primarily due to wage hikes. Finally, we continue to advance our infrastructure to intelligence strategy through unique partnerships with frontier AI companies and new launches. We announced a global premier partnership with Anthropic, which gives us [ yearly ] access to Claude family of models, 50,000 licenses, a joint GTM campaign, co-creation of industry solutions and TCS iON, as training and certification partner. TCS also became the first [ GSA ] partner for Mistral AI. Together, we'll build sovereign and custom AI models for enterprises and establish a dedicated COE for developing industry solutions across BFSI health care, manufacturing and public sector. We also launched [ TCS Sovereign Secure Cloud ] for Europe, directly addressing rising demand from governments and regulatory enterprises for compliant sovereign and AI-ready cloud infrastructure. This strengthens TCS's leadership presence in Europe, as citizen clients' prioritize data resiliency, operational control and geopolitical risk indication. We launched a dedicated global value and innovation center business unit to help enterprises build, operate, transform or diverse global capability centers. [ HyperVault ] is strengthening TCS market positioning and deepening 360-degree partnership with clients and ecosystem partners. In Q1 FY '27, these partnerships enabled 2 very large IT services deals, which were net new for us. I will now invite Samir, Aarthi and Sudeep to go over different aspects of our performance during the quarter. I'll slip in later to provide more color on the demand trends that we are seeing. Over to you, Samir.

Thanks, Krithi. Good day, everyone. Our quarterly revenue was INR 72,275 crores [indiscernible] 2.2% in 4Q and 13.9% in rupee terms. In dollar terms, revenue was USD 7,624 million, which was flat growth sequentially and 2.7% Y-o-Y. [indiscernible] constant currency terms was 40 basis points sequentially and 3.2% year-on-year. This quarter, we have undertaken a refinement of cost categories to address the previously elevated other expenses to provide a clearer view of the underlying cost drivers. This change has no impact on overall expenses or operating margins, and prior periods have been aligned for comparability. Prior full quarter comparative details are available in our quarterly fact sheet. Operating margins for the quarter was 24%, declining 130 basis points sequentially. In Q1, we rolled out annual increments for our global workforce, which impacted margins by 170 basis points. We strengthened our partnership ecosystem and made targeted investments, which we were able to partly offset with 40 basis points of currency benefit and operational efficiencies. Our strong profitability allows us the ability to make significant investments, which are aligned with our aspiration. We are investing in AI capabilities, talent transformation, partner ecosystems, platforms, domain solutions and go-to-market capacity. These investments are necessary as client demand increasingly requires integrated offerings across the infrastructure to intelligence AI stack. At the same time, we continue to drive operational rigor through [ pyramid ] optimization, productivity improvement, better resource fulfillment, automation and disciplined cost management. As we have demonstrated in the past, our approach is to not optimize margins in isolation, but to invest in capabilities that strengthen our long-term competitiveness, while continuing to deliver industry-leading profitability and return ratios. Net margin for the quarter was 19.2%. DSO stood a sequential -- stood at 74 days in dollar terms, and constant sequentially. Our cash conversion remains strong at 93% of net income. Invested funds at the end of the period stood at $5.3 billion. Our capital allocation policy remains unchanged, and we remain committed to returning substantial free cash flows to our shareholders while judiciously investing to support our long-term growth aspirations. I'll now invite Aarthi.

Thank you, Samir. Good evening. Q1 saw strong growth momentum across our services portfolio with multiple AI transformation wins. AI demand continues across IT operations, software engineering, modernization, business process transformation and enterprise platform implementation. The [ major ] of engagements ranges from AI-led optimization to large-scale AI-native transformation program. Let me share a few of our key deal wins this quarter. We signed a mega deal with SKF to enable transformation across infrastructure, applications, enterprise systems and business processes. The program will help SKF build an AI-native enterprise through global process standardization on S/4HANA, AI-led IT ops and business transformation to drive revenue growth, working capital improvement and predictable IT costs. For a large North American utility major, we are transforming a decade-long collaboration into a future-ready operating model. The engagement will modernize operations across grid management, customer experience, asset management, workflow enablement, while building a scalable foundation with strong AI governance and life cycle management. TCS won this renewal with an AI-first proposition for existing services and was also chosen as a partner for transformation of the utility major into an AI company. This quarter, we also had multiple deal wins in autonomous GBS, across HR, finance and customer experience. Agentic operating model is at the core of our customer value commitment in BPS. Agentic AI has rapidly dominated customer conversations this year and is increasingly shaping how we design and deliver solutions. With growing adoption, AI governance is becoming a top priority for enterprises. TCS is investing in enabling customers deploy and manage AI securely through our agentic control plane, providing governance, observability, life cycle management and cost control. Let me take you through how agentic AI is being deployed across enterprises for IT and business transformation. AI agents in software engineering, IT operations and technology modernization are becoming mainstream. Enterprises are combining agentic capabilities from their existing tool investment with contextual agents for providing -- for improving productivity and resilience while accelerating time to market as well. For a large retailer, 70 agents are orchestrating IT ops across more than 50 infrastructure and application workflows, integrating with the customer's ITSM tools. Continuous 24 by 7 monitoring and 24 by 7 operations have shifted to largely human monitoring to AI-led monitoring. The transformation has resulted in 30% faster remediation and 80% fewer incidents. Business process transformation with agentic AI will be a significant opportunity across industries. Enterprises are looking at both redesigning workflows with AI as well as driving process optimization with AL. TCS is building domain-specific workflow blueprint and agentic vertical platforms with [indiscernible] agents across industry domains to accelerate business transformation. Let me share an example of how AI agents are working alongside humans to transform worker compensation workflow for a global specialist insurer. TCS has deployed 7 AI agents, including specialized medical and fraud review agents who are operating alongside human examiners. This human plus AI operating model has cut claim settlement by 40%, replacing a legacy process that relies on several sequential human handoffs. The result is faster and more consistent claim operations, with meaningful impact on cycle time and customer experience. We will continue to drive focused execution on our infrastructure to intelligence strategy that we announced last year. As all of us know, AI is evolving at unprecedented speed with model capabilities emerging rapidly. We continue to integrate the latest advances into our services, platforms and solutions in collaboration with our partners. Thank you. I'll now hand it over to Sudeep.

Thank you, Aarthi, and hello, everyone. Our workforce at the end of quarter stood at 593,798.This quarter, we completed the annual salary increments for all associates globally, and also aligned salary structures of our India associates with the new India Labor Code requirements. We continue to build a workforce equipped for evolving client needs to balanced talent strategy that combines fresh talent, experienced [indiscernible] and sustained talent development. Our campus hiring continues to focus on digital and AI-native talent, supported by reimagined initial learning program and stronger AI-centric curriculum. We are investing in the trainee pipeline and deployment readiness through experiential project-based learning while gradually moving towards a more skill-centric employee pyramid. We're also investing in large-scale upskilling and reskilling of our existing workforce. TCS continues to operate one of the industry's largest enterprise learning [ engines]. In Q1 FY '27, associates launched 14.6 million learning hours and gained over 1.3 million competencies. Our lateral hiring is focused on domain-specific and AI-native talent. Over 50% of the lateral hires already possess next-generation skills, and we expect this share to increase as we continue to build talent depth. Looking ahead, we remain focused on enabling our people to be future-ready through investments in AI infrastructure and next-generation skill development programs. We are committed to fostering a workplace environment where every associate feels safe, valued, trusted and empowered to grow. Thank you, and I'll now hand it over back to Krithi.

Thank you, Sudeep. Let me now share details of our key industry performance this quarter. BFSI delivered good growth across geographies. Tech software and services continued its growth momentum. We successfully won several large and midsized deals in this segment, including a multimillion-dollar deal with ServiceNow. The consumer business grew. The quarter was driven by a combination of inflationary pressures and ongoing geopolitical uncertainties, impacting discretionary spend. In this environment, client priorities are around managing their increasing costs. Growth initiatives remain selective, centered on targeted areas that could deliver scalable impact without increasing risk exposure. Life sciences and healthcare declined this quarter. However, core demand for AI transformation, automation and compliance initiatives remain intact. Recovery is expected soon. Manufacturing continued to show softness in certain segments like auto, while decision-making was influenced by tariff pressure, macro uncertainty, EVD calibration, supply chain resilience and cost discipline. However, our outlook remains positive for manufacturing based on multiple net new deals we signed this quarter. For instance, we announced a landmark $800 million global AI-led business transformation deal with SKF who are redesigning their interface operations around an intelligent digital code. We also further strengthened our collaboration with ABB through a new multimillion-dollar future network model management. We also signed a multimillion dollar deal with a global Fortune 50 European firm. All of these are completely net new AI-led opportunities. In [ CMI ], the industry headwinds continue to play out. We delivered modest growth in this segment. While ERU had a slight decline this quarter, we are positive on the growth prospects of this segment on the back of AI infrastructure build-out, electrification, renewables, energy security and mining critical materials. In regional markets, growth was driven by India public services and our products and platform. To summarize, enterprises are investing in transformation that improves resilience, resilience, productivity, security and readiness for AI. AI-led transformation, modernization, cybersecurity, sovereign cloud, platform rationalization and vendor consolidation are attracting client investments, and TCS is favored as a partner of choice for our clients. We are encouraged by the quality of wins, strong client mining, steady AI monetization, relevance of our offering and the strength of our long-term competitiveness. These factors give us confidence that TCS is well positioned to convert demand into stronger growth as client spend normalizes and AI adoption scales across the enterprises. We remain focused on execution, on deepening partnerships and on building capabilities that position TCS strongly for the AI transformation cycle ahead. We are confidently marching towards our aspiration of becoming the world's leading AI-led technology services company. We will pursue this aspiration with discipline, responsibility and a continued focus on creating sustainable value for our clients, employees and shareholders. With this, we will open the line for questions.

[Operator Instructions] We take our first question from the line of Kumar Rakesh from BNP Paribas.

My first question was around the demand environment, especially from the near-term perspective. So how did you see the quarter, if you could quantify the impact from some of the macro and geopolitical uncertainties you saw in the quarter? And did that pick up during the quarter? And how do you see that panning out in the September quarter? Are there any more incremental impact that you see going into the September quarter?

Kumar, we called out some time earlier also, whatever factors we saw in Q4, we initially said that things were improving, but then around March, we started seeing geopolitical uncertainties increase. That sentiment continued through the quarter. And I think I know whether when will this change because the overall many of the ongoing conflicts are continuing. And we also saw many situations our clients wanting to defer some of the projects during the quarter. So these 2 were the effects we saw. But if you ask me, overall, we are still optimistic that the demand will resume in sometime in Q2 because -- primarily because our customers have a significant amount of pent-up technology backlog to be completed. So I expect the demand to improve sometime in Q2. So we're generally optimistic on Q2 going in at this time.

My second question was around the SG&A investments. And you have called out earlier as well that you are making investments especially around AI, and that line item is up by about 16% in dollar terms year-over-year. So if you could give us some more granular color what investments we are making over there. Is it sales hiring? If so, in which geography, which areas we are focusing? Or anything else which we can have a better sense of what areas we are incrementally investing on?

The overall SG&A, which we -- so one, Kumar, as we talked about, the reclassification, we have done away with the split-up of [ VAR ] and SG&A. But as you rightly said, on -- from the IFRS, the SG&A investments have been increasing. And like we have been previously reporting, it is mainly on the employee side of it. And also in terms of the partnerships and targeted investments, this also includes the charge-off on the M&A side.

Next question is from the line of Yogesh Aggarwal from HSBC Securities.

A couple of questions. So firstly, thanks for sharing the AI revenues and the details around the AIV. But I think the picture will be a lot more complete if you can also discuss the impact percentage of revenue that the business or the client has already gone through the productivity pass-through and how much is left. So is it significant or is it not a large share?

Yogesh, your line was not very clear, but I'm assuming your question is around any overall revenue deflation because of the productivity gains coming out of AI. Is it right?

What part of the business has already gone through it?

It's difficult to quantify on what. See, what we can see is, as and when the project's coming up -- come up for renewal, we find that we work -- as we find opportunities along with our clients to our net productivity benefits and pass them onto our customers. And also there are some situations where our associates proactively look at opportunities and go to our customers and say that we can reduce the overall spend. But we also have seen in many places, whenever we go to our customers with such opportunities, customers give us additional work and so that the top line is not significantly impacted. So this is an ongoing process, Yogesh. It would be very difficult to say whether we are done with all productivity gains are being passed on. And what I -- one quantification I can give you is in most places, the productivity gain [indiscernible] around 10% to 15% range.

Right. And just a clarification. So Europe and U.S., in particular weak in this quarter, which is originally a strong. You were saying that the...

Yogesh, I'm sorry, you're sounding muffled.

Okay. I'll come back in the queue.

Next question is from the line of Sudheer Guntupalli from Kotak Mahindra AMC.

Firstly, on the incremental AI revenue added. We added $75 million of incremental AI revenue this quarter, versus $125 million of incremental revenue added in the March quarter. Is there any peculiar seasonality here or was this quarter impacted by West Asian conflict or any other matters? The reason I'm asking is we don't have the full time series pattern to sort of understand the trend.

Sudheer, we have to yet understand this AI revenue. It's not like a traditional [ ADM ] driven that -- this is not the sort of annuity revenue and all. This is something that more or many of these projects tend to be 1-quarter, 2-quarter projects, so where we compete and we have to win again new projects and accrue the revenue, to deliver and accrue the revenue. So there would be some quarters where we would be able to get that. This will tend to be a little lumpy in terms of the size of the overall revenue that we get. But what we look for is, is continuously increasing and the conversations with our clients. Are they yielding more opportunities? But we are quite happy with the kind of growth we've been seeing on a quarter-on-quarter basis because of the nonrecurring nature of this work.

Got it, sir. And the second question is the latest [indiscernible] in the industry is forward deployed engineers. If we were to loosely equate this, would the role of a product manager in the digital era be a comparable benchmark for the role of an FDE? And a connected question is, if you were to assess your overall workforce, so how many FDs would you count upon in the overall global workforce that you have right now?

Yes. Sudheer, this is Aarthi. I think, firstly, the definition of FD, right, is evolving as we speak. But within TCS, we have come up with a definition that we are -- and along with the definition, the building of competencies and deployment of those engineers. And as you know, they have these work in parts [indiscernible] so the entire operating model around FDE is something we are defining. And if you look back in the last year, since we started delivering in the new operating model with AI, we call it Innovative AI, Build with AI, Scale with AI, which is our AI acceleration playbook that we came up with last year, we had this concept of rapid-build engineers, which is very similar to a forward deployment engineers. The difference being that a forward deployment engineer would have multiple skills but would be very deep on one particular skill, sometimes technical or a domain, but work with a toolkit that the person takes to go and solve a problem. So most of these FDE deployments are a different kind of project where you start with a problem that you solve for and then you deploy the [indiscernible] and the engineers. And I would not equate this to the role of a product manager, right? So these are specialist engineers who are multi-skilled, but deep on one particular skill, right? We used -- in TCS, we coined a term many years ago as a [ T factor], so which we coined during the digital era. And I think the FD fits right quite well into the same [ T factor ] capability model. And at this time, I wouldn't put a number to how much we have because this is a transition period, and we are building these skills. But going forward, we would definitely target to have the definition that we come up with at least 1% of our employee base, we would want to target to have -- to work in the new operating model. But this is not a onetime jump. It is a transition. We are already working in the FD model with our rapid build methodology. But the definition and the operating model, I expect it to evolve.

And Krithi, one last question. To your earlier response on the West Asian conflict impact. You said the uncertainty which started in March continued through April, May and June. So if you were to quantify the rate of change, given that you are expecting improvement sometime in the second quarter, are you seeing that it would have already peaked and it is a sort of improving the situation on a month-on-month, week-on-week basis? So how would you essentially quantify the rate of change of this dynamic?

I won't say quantify the rate of change. I can only talk based on the conversations we are having with our customers. So for instance, we did talk about in this quarter that we expect the life sciences to do better. So some verticals we see, there is a stronger uptick visible. So that gives us the confidence -- and overall conversations that we are having with customers in different verticals is giving us confidence. I don't know whether I can put a rate of change or quantify that at this time.

Next question is from the line of Nitin Padmanabhan from Investec.

A couple of quick ones. So one is, see, last year, we had very solid deal win growth in retail and consumer, so while consumers seems to be soft. So is it that those deals aren't converting to revenue? Or do you think that pipeline should start converting to revenue and should lead to some growth as we move forward? That's the first one.

We think there are multiple factors playing out here. While we did sign large deals, we did have a few projects -- large projects ending also. Because of the large projects closing, the net addition was -- these new projects net addition was ramping up, and so we are still not there to completely recover from those large projects. But I think as the quarters move along as the large projects that we signed up, as they start yielding revenue, we'll start seeing growth.

Sure. And from a -- there's 2 questions from a demand perspective. So one is that in the U.S., corporate revenue growth seems to be quite decent. I think consensus expectations on growth for this year on growth overall is pretty broad-based across industries and seems pretty strong. And historically, we have seen a very high correlation. But this time around, it looks like it's not really coming through. So why do you think we are seeing this dynamic? Is it more being attuned to the demand that is not happening? Or is it there is a real caution on spend? But if there is velocity of growth, then why should spend be so curtailed? Is the first question. The second question is from a -- are you cautious on BFSI, if I understood your commentary? Or you think that BFSI continues to do well?