TCS Sees 3% Revenue Drop Despite AI Gains, Signals Bleak Q1 for Indian IT
TCS opened the new fiscal year with disappointing numbers and familiar challenges, and little to no confidence in generative AI. Revenue for Q1 FY26 came in at ₹63,437 crore, up just 1.3% YoY, but down 3.1% in constant currency, making it another poor quarter for the company. In terms of QoQ, the revenue largely stayed flat compared to Q4 FY25, where the growth stood at just 0.8% QoQ and 5.3% YoY in dollar terms. Even as revenue slowed, TCS managed to protect its margins. Net income rose 6% YoY to ₹12,760 crore. Operating margin also ticked up slightly to 24.5% from 24.2% in Q4, helped by a strong focus on cost discipline and efficiency. The challenges remain the same as last quarter. K Krithivasan, CEO and MD, said in the press release, “The continued global macro-economic and geo-political uncertainties caused a demand contraction.” So, What About AI? No specific AI-led deal wins were disclosed, nor was there evidence that GenAI services have offset the broader demand slowdown. This is a departure from Q1FY25, when the company reported a generative AI pipeline of $1.5 billion. Read: Indian IT Loves AI Washing Now, it’s been four quarters. This shows a continued trend of AI washing for the large Indian IT firms. This quarter, TCS shifted its focus to AI scaling, new branded platforms like “SovereignSecure” and “DigiBOLT,” and generic claims around AI infrastructure investments. The leadership claims that clients are no longer just exploring AI, but they’re asking for returns. “Clients are increasingly shifting their focus from use case-based approach to ROI-led scaling of AI,” said Aarthi Subramanian, executive director and COO, in the press release. During the conference call, Subramanian noted, “I think the whole shift from doing experiments to doing real projects that deliver value, that shift has happened…AI revenues have grown,” while adding that AI is pervasive in every deal and offerings. She later added that agentic AI is also becoming a part of all conversations with clients. “We have already built agents are many in the roadmap,” Subramanian added about sectors like BFSI and manufacturing. But the total contract value (TCV) actually dropped to $9.4 billion from $12.2 billion from the previous quarter, though it increased by 13.2% YoY. But AI is still part of the deals. Krithivasan said that TCS is comfortable with the amount of deals that happened this quarter. This shows an emerging pattern in which, whenever growth slows, the AI narrative becomes louder. Last quarter, the company talked about 150+ agentic AI solutions, AI-powered vegetation management, and generative script analysis for OTT clients. Still, the slowdown in TCV is hard to ignore. TCS is betting on AI to lead its next phase of growth, but the near-term numbers continue to show pressure. When asked about the timing of growth recovery in Q2 and the status of paused deals, TCS leadership said it’s still too early to predict. “It could be too early to call out when growth will resume, which, to a great extent, depends on more clarity emerging in the macroeconomic scenario,” Krithivasan said. Despite near-term uncertainty, he reiterated its earlier guidance. “From an outlook perspective, we are still confident and optimistic that international revenue in FY26 would be better than our FY25 revenue overall.” Meanwhile, Accenture, one of the long-standing “rivals” of the Indian IT firms, has given a $1.5 billion AI wakeup call for the firms making AI their top priorities. While Accenture restructures around AI-led delivery, Indian IT remains stuck announcing platforms and partnerships with no P&L impact. Read: Accenture’s $1.5 Billion AI Wake-Up Call for Indian IT TCS said that areas like AI, data, cybersecurity, interactive, and application modernisation performed well in the quarter. “Customers are investing in industry-specific solutions,” said Subramanian during the conference. “AI for modernisation is coming across as a strong theme, because GenAI is now becoming the tool to really understand the legacy code and use GenAI to convert and forward engineers to a modernised architecture and application.” She added that there is also “significant demand” in enterprise solutions, particularly around modernisation using SaaS platforms. Speaking of AI coding tools, Subramanian said AI is starting to demonstrate value. “The productivity gains are there for coding, but when you look at a software being built, there is much more end-to-end right from conceptualisation all the way to testing and delivery.” The Headcount of TCS and Declining Software Spend Adding to this, TCS’ headcount stood at 6,13,069, a modest increase of 6,071 over last year. But attrition climbed marginally to 13.8%, compared to 13.3% in the previous quarter. While not alarming, it remains something to watch given the ongoing shift towards high-skill roles in AI and cloud. Milind Lakkad, chief HR officer, said, “Talent Development is core to TCS. In this quarter, our associates invested 15 million hours in building expertise in emerging technologies, enabling them to lead the transformation journey for our customers.” This was Lakkad’s last press conference with TCS. He added that TCS has over 114,000 employees equipped with ‘higher-order AI skills’. But there’s little in the earnings report to quantify what that means in terms of productivity, billable hours, or client impact. TCS had made changes to its bench policy to improve utilisation. Under the new guidelines, all employees must be billable for at least 225 days a year, with only 35 days of allowable bench time. TCS attributed this shift to rising automation and client demand for faster, AI-driven delivery cycles. This is a silent warning that clients are no longer willing to pay for bodies on standby, while all they want is AI-speed execution. The company onboarded 42,000 trainees in FY25 and had previously announced plans to onboard more in FY26. Lakkad said that the company is still on track for it. It is also interesting to note that the equipment and software licences expense for the firm has dropped by at least 4 times from ₹2,748 crore in the last quarter to just ₹726 crore. This might signal a shift towards more AI-based solutions being used in-house by employees. For the full year of FY25, TCS crossed $30 billion in revenue, growing 3.8% YoY, with constant currency growth at 4.2%. Krithivasan noted during the Q4 FY25 earnings call that the uncertainty in March led to project delays, though not outright cancellations. This is ongoing and may have a similar impact on other firms reporting their results, starting with HCLTech next week. In contrast to the subdued topline growth, deal momentum remained strong even in this quarter. The market is expecting similar results for other IT firms after the extremely weak Q4 FY25 and TCS’s poor performance.
No specific AI-led deal wins were disclosed, nor was there evidence that GenAI services have offset the broader demand slowdown.
TCS opened the new fiscal year with disappointing numbers and familiar challenges, and little to no confidence in generative AI.
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["Go", "GenAI", "agentic AI", "AI coding", "AI", "automation", "Aim", "ViT", "generative AI", "R"]
["AI", "generative AI", "GenAI", "agentic AI", "Aim", "R", "Go", "ViT", "automation", "AI coding"]
Mohit writes about AI in simple, explainable, and often funny words. He's especially passionate about chatting with those building AI for Bharat, with the occasional detour into AGI.