TCS, HCLTech Q3 Revenue Beats Expectations Amid Rising Labour Costs
Overview
Tata Consultancy Services (TCS) and HCL Technologies exceeded revenue forecasts for the October-December quarter. TCS reported $7.51 billion, while HCLTech posted $3.79 billion. However, new government wage norms led to substantial additional costs of nearly $350 million combined, squeezing profit margins despite the top-line surprise. Demand remains robust, though visibility varies.
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India's IT Giants Start Earnings Season Strong Despite Cost Headwinds
Bengaluru: India's premier IT services firms, Tata Consultancy Services (TCS) and HCL Technologies, kicked off the October-December earnings season with revenue figures that surpassed analyst expectations. The robust top-line performance, however, was tempered by increased labor costs stemming from new government wage regulations, raising concerns about profitability.
TCS announced quarterly revenue of $7.51 billion, a slight 0.4% year-on-year decline but a 0.6% increase from the previous quarter, exceeding the $7.43 billion predicted by a Bloomberg poll of 32 analysts. HCL Technologies reported $3.79 billion in revenue, beating Bloomberg's estimate of $3.7 billion and showing healthy growth of 7.4% year-on-year and 4.1% quarter-on-quarter.
Profitability Under Pressure
While revenue surprised positively, net profits showed mixed trends. TCS posted a net profit of $1.5 billion, up 3.1% year-on-year and 2.7% sequentially. HCLTech's profit stood at $537 million, a marginal 1.3% year-on-year decrease but a notable 10.5% rise from the prior quarter. The companies collectively incurred nearly $350 million in additional costs due to government labor codes mandating that basic pay constitutes at least 50% of total compensation, impacting statutory payouts like provident fund and gratuity. TCS absorbed $238 million of these costs, while HCLTech accounted for $109 million.
Demand Outlook Remains Mixed
Company leadership expressed confidence in sustained demand, albeit with differing outlooks. TCS CEO K. Krithivasan noted a continuing improvement in the demand environment, with a focus on short-cycle projects yielding clearer returns. HCLTech CEO C. Vijayakumar, while acknowledging persistent global market uncertainty and slower spending growth, affirmed the structural demand for technology in business transformation. HCL Technologies adjusted its full-year revenue guidance to 4-4.5% from the previously projected 3-5% range.
AI Traction and Headcount Adjustments
Both firms highlighted progress in Artificial Intelligence (AI) services. HCLTech reported $146 million in AI revenue for the quarter, bringing its total to $246 million. TCS disclosed $1.8 billion in annualized revenue from AI services, a 17.3% quarterly increase in constant currency terms, though definitions remain unspecified. In terms of personnel, TCS reduced its headcount by 11,151 to 582,163 employees, marking a trend observed in recent third quarters. HCLTech also saw a slight decrease, cutting 261 employees to end with 226,379.
