Tata Consultancy Services Ltd (TCS) in the September quarter but posted its slowest second-quarter growth in three years, and management said client demand has yet to improve.
India’s largest tech services firm reported revenue of $7.64 billion for the July-September 2026 quarter, up 0.2% sequentially and 2.36% from a year earlier. The compares with a revenue forecast of $7.55 billion in a Bloomberg poll of 34 analysts.
Banks and financial institutions, which account for a third of revenue, drove most of the incremental business and offset declines in regional markets.
“The demand environment has not materially changed since last quarter, and discretionary programs without near-term value remain under scrutiny,” chief executive K. Krithivasan said on the post-earnings analyst call on 8 October.
The cautious commentary is a signal for Infosys Ltd, HCL Technologies Ltd and Wipro Ltd, which are due to report second-quarter results in the coming weeks. TCS is closely watched as a barometer of the broader technology services industry.
The slow quarter also makes it harder to speed up in the second half of the fiscal year, which has fewer working days because of holidays.
The management declined to say whether TCS would grow faster over the next two years than it did over the previous two, or whether revenue lost to AI is now being offset by new growth opportunities. At least four analysts raised these questions on the call. The reticence reflects uncertainty over the spread of AI and a shaky global economy.
Most concerns about future growth stem from geopolitical uncertainty, which is forcing clients to pull back on technology spending.
Automation tools
The rise of automation tools poses another challenge to India’s IT services firms, as much of their core work in software development, maintenance and coding can now be automated.
However, clients “are keen to invest the productivity benefits from AI into enterprise transformation initiatives that will make their organisation future-ready. TCS is benefiting from this shift,” said Aarthi Subramanian, chief operating officer at TCS. The company reported $3.1 billion in annualised AI revenue last quarter.
For now, this performance has not translated into higher profitability.
TCS’s operating margin was unchanged from the previous quarter at 24%. This marks the second consecutive quarter in which the company has not improved its profitability, at a time when margins had been expected to expand.
Much of the pressure came from higher subcontractor costs, as the company hired subcontractors because of skill and demand mismatches, which were offset by currency gains and better execution.
TCS Q2 Results: Analysts’ take
At least two analysts said the company’s margins were a talking point.
“Growth was in line with expectations but margins were on the lower side during a time when it was expected to expand. This had to be done in order to win more deals as they now have to prioritise growth, which is coming at the cost of margins,” said Amit Chandra, vice-president of HDFC Securities.
A second analyst attributed this to AI-fuelled pricing pressure.
“The lack of operating leverage despite favourable currency movements suggests that underlying pricing pressure may be stronger than anticipated, with management seemingly reinvesting a large part of the currency benefit back into delivery and execution,” said Manav Medewala, research analyst at Mirae Asset Sharekhan.
On the other hand, management said it is prioritising making the company future-ready over focusing solely on margins.
“We have been talking about prioritising the investments and focusing on growth at the same time maintaining the margin discipline,” said Samir Seksaria, chief financial officer of TCS. The Mumbai-based firm does not provide quarterly or full-year revenue guidance, but management said it expects client spending to improve.
Still, for TCS to match its revenue of $30.02 billion in the previous fiscal year, the company needs to report an average of $7.38 billion in revenue in each of the next two quarters.
However, much of the company’s growth is also expected to be fuelled by acquisitions. Last fiscal, the company spent about $750 million on two acquisitions, including a $700 million buyout of Coastal Cloud, its biggest acquisition since listing on the stock exchanges.
The company reported $15.27 billion in revenue in the first six months of the fiscal year, up 2.55% from the same period last fiscal.
A sore spot in its report card was net profit, which fell 0.68% sequentially to $1.45 billion. This was its third consecutive quarter of declining profit.
HDFC Securities’ Chandra said that TCS will take another three quarters to accelerate growth.
“It needs a change in macros that will push discretionary spending towards IT. Second is that revenue from new age services must increase at a faster pace. Thirdly, deflation has to reduce while AI models and agents become part of pricing, which will translate to growth,” said Chandra.
Still, the company’s AI ambitions did not deter its headcount growth, as TCS added 4,258 people to end the first half with 598,056 employees. Management added that it would continue to hire based on future demand.