TCS likely to post flat Q1 growth as demand recovery remains elusive: Report

Tata Consultancy Services (TCS) is expected to kick off the June quarter earnings season with muted revenue growth and lower profitability as global macroeconomic uncertainty, cautious client spending and AI-led productivity concerns continue to impact India's $280-billion IT services sector.

According to a preview report by Motilal Oswal Financial Services, TCS is likely to report flat sequential revenue growth in constant currency (CC) terms for the first quarter of FY27, as steady demand from the banking, financial services and consumer segments is offset by weakness in communications, manufacturing and North America.

The brokerage expects TCS' operating margin to decline by 140 basis points sequentially to 23.9%, mainly due to annual wage hikes effective April, although productivity gains, operational efficiencies and favourable currency movements may partly cushion the impact. Revenue is estimated to rise 13.1% year-on-year to ₹717.5 billion, while adjusted net profit is seen growing 5.8% year-on-year to ₹135.6 billion but declining 1.6% sequentially.

A broader slowdown across IT industry

The subdued performance is expected to reflect a broader slowdown across the industry, with demand commentary likely to remain cautious during the quarter as enterprises continue to delay discretionary technology spending amid macroeconomic uncertainty, geopolitical tensions and evolving AI adoption strategies. The brokerage expects this weak trend to extend into the September quarter as well.

For the large-cap IT universe, sequential constant currency revenue growth is expected to range between a decline of 1.5% and growth of 2%. Infosys is projected to lead the pack with around 2% sequential CC growth, aided by acquisitions, while Tech Mahindra may post nearly 1% growth driven by telecom deal ramp-ups. HCL Technologies and Wipro are expected to report sequential declines because of client-specific issues, delayed project ramp-ups and seasonal weakness.

Infosys to lower the upper end of its FY2

The brokerage also expects Infosys to lower the upper end of its FY27 revenue growth guidance by 50 basis points to 3% from the current 3.5%, while HCL Technologies could reduce the upper end of its services growth guidance by 100 basis points, citing a slower-than-expected recovery in demand.

Among industry verticals, banking and financial services are expected to remain the most resilient, supported by ongoing deal ramp-ups and relatively stable technology spending. High-tech spending remains mixed, with AI-related projects partly offsetting weakness in certain client accounts, while telecom continues to face pressure and manufacturing demand remains uneven across automotive and industrial customers.

Mid-tier IT companies to outperform their larger peers

Mid-tier IT companies are expected to outperform their larger peers for another quarter, with Hexaware projected to deliver 4.8%t sequential CC revenue growth, followed by Persistent Systems at 3% and Mphasis at around 2%, supported by continued execution of large deals.

Despite a sharp correction in valuations, Motilal Oswal said a sustained re-rating of the sector would require visible improvement in demand, stabilisation in revenue growth and stronger evidence that AI-led opportunities are beginning to offset productivity-related pricing pressures. Consequently, it has reduced valuation multiples across most IT stocks by 15-20% to reflect slower growth expectations and rising uncertainty.