Tata crown jewel TCS, sans Ratan Tata, reports earnings today: Five points to ponder

On an end-of-era day for the Tata Group, Tata Consultancy Services gears up to report its earnings shortly after markets today

By Harichandan Arakali Forbes India Staff

Published: Oct 10, 2024 12:14:56 PM IST

Updated: Oct 10, 2024 12:27:33 PM IST

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TCS finds itself reporting quarterly earnings on the day Ratan Tata, embodiment of the group, died. Image: Shutterstock

Tata Consultancy, India’s biggest IT services company and historically referred to as the crown jewel of the Tata Group, finds itself reporting quarterly earnings on the day Ratan Tata, embodiment of the group, died.

TCS does not provide any quantitative projections, but investors will be keenly analysing any forward-looking comments from CEO and MD K Krithivasan and his top colleagues. Here are five points to ponder:

1. What are customers saying about discretionary IT spending?

Historically, the robustness of discretionary spending used to be a good indicator of the strength of demand in the tech services sector. Discretionary projects, as the term suggests, referred to projects that were good to have, which added value from a longer-term perspective, but were not essential in the near term for an enterprise customer to run its business.

Today, a combination of factors is causing that demarcation to blur, according to IT industry experts. The protracted macroeconomic uncertainty is one factor. Amazon Web Services, Microsoft, and Google’s cloud unit – together the three biggest ‘hyperscalers’ as they have come to be known – all pushing to make cloud computing the default destination for IT is another.

“From discretionary demand point of view, the size and shape of that discretionary spend (itself) is changing,” Yugal Joshi, a partner at Everest Group, a research and advisory company, said in a recent interview with Forbes India. A lot of that discretionary spend is getting bundled into the run-the-business expenditure or into budgets for services managed by providers like the IT companies.

“So then tracking that discretionary spend may itself become a bit of a challenge,” Joshi adds.

2. Are IT companies beginning to make money on generative AI projects?

In recent times, there’s some evidence that IT companies are moving from pilot projects to product-grade work that is beginning to generate some revenue for them. It’s early days, however.

For example, in an interview with Forbes India on September 26, Amit Chadha, CEO and MD of Larsen and Toubro Technology Services, said this: “Six months ago we were running some 50 PoCs (proof of concept) out of which only 30 percent were paid, 70 percent were unpaid. Today I've got paid engagements, teams running, supporting our customers and AI is a revenue generator for organisation.”

The longer-term view is that as the first set of large language models move from being trained and tuned towards more mainstream use for inferencing by large enterprise customers, the size and scope of IT projects will also expand.

Also read: Ratan Naval Tata: Legend through the years

The French multinational banking and financial services provider BNP Paribas estimates that hyperscalers will see $330 billion to $560 billion in just the generative AI related cloud revenue by 2030 – based on their current rate of expenditure on building up data centre capacity.

Growing generative AI use by the IT sector’s biggest customers implies the software services companies will see a corresponding growth in opportunities in “deployment, customisation, and management of large-scale AI models for enterprise customers, in our view,” Kumar Rakesh, an analyst at the bank’s Exane unit, writes in an October 3 research note.

3. What does the large-contract pipeline look like after Q2?

In recent weeks, both TCS and second-biggest Indian IT company Infosys have both reported winning new contracts or expanding existing ones with large enterprise customers in the US, Britain and Europe.

Both companies provide some data on their contracts. TCS gives the total contract value it secured during the reporting quarter, while Infosys provides the total large-deal contract value it signed up in the three-month period. The company defines large deals as those valued at $50 million or more over the life of the contracts.

In the first six months of calendar year 2024, overall deal wins have held up, but have been somewhat uneven. For example, TCS reported a record $13.2 billion in total contract value won for the January to March 2024 period and in comparison, the TCV was $8.4 billion for the April to June period.

Rakesh’s research note estimates TCS’s order book rose 13 percent in the last 12 months and nearly 80 percent for Infosys. Investors will be looking for more data today.

Also read: 5 Questions to Anant Adya at Infosys on how AI is influencing the shift to the cloud

4. Will there be a pickup in recruitment, reflecting more spending?

Recruitment experts at staffing firms have noted a modest pickup in hiring in the industry, which has a workforce of some 5.34 million. The number of active IT job openings in May was 107,000, Xpheno, a specialist staffing company in Bengaluru, estimates. This rose to 125,000 in August and 1,35,000 in September.

For now, the modest increase – of about 10 percent month-on-month – can be attributed more to hiring of IT talent by non-tech employers such as banks and pharmaceuticals companies as well as the expanding software centres of multinational companies in India, according to Kamal Karanth, co-founder of Xpheno.

Overall, in the last 12 months, the IT companies have shed nearly all the vacancies that they filled in the previous few quarters during an immediate post-covid surge in demand. Attrition or staff churn remains low, at around 12 percent for TCS, for example.

TCS hired over 5,000 people in April – June quarter this year, a first big increase among the top IT companies in recent quarters. Commentary on the rest of the year from the company’s CHRO Milind Lakkad will show how the landscape is shifting.

5. How will the rest of the year play out and into the next fiscal year?

“Although investors are now far more sanguine about the sector, evidence of recovery in growth, deal TCVs and management commentary would still be needed to lock-in the growth recovery narrative,” the analyst at BNP Paribas, writes in his note.

If discretionary spending returns, then companies such as Infosys and HCL Technologies are well-placed to take advantage of it with their “strong digital capabilities,” the analysts add.

Once again, future tech spending will increasingly be decided by what the IT sector’s biggest customers do with respect to AI. The AI hardware and software market will likely grow between 40 percent and 55 percent annually, potentially reaching $990 billion by 2027, the consultancy Bain & Company projects in its fifth annual global technology report, which was released on Sep 25.

This could translate to a boost to India’s IT sector. For the near term, consider that in July, Infosys projected its FY25 revenues to grow 3-4 percent in constant currency, which was a notable increase from the 1-3 percent forecast in April. Analysts are now expecting that Bengaluru-headquartered Infosys, when it reports its fiscal Q2 earnings on Oct. 17, will further raise its outlook for the full year that ends March 31, 2025.

Good days ahead again for the sector, perhaps.