Behind the Dip: What TCS’s Q1 Says About the IT Sector’s Outlook

Tata Consultancy Services (TCS) kicked off FY26 with results that didn’t shock—but didn’t impress either. As the bellwether of India’s $250 billion IT industry , its Q1 performance is less about one company’s earnings and more about the pulse of an entire sector under pressure.

With global tech spending under strain and deal momentum slowing, the numbers reflect a market that remains cautious—and a sector searching for its next growth catalyst.

Reviewing TCS Financials

In the first quarter of FY26 (April–June 2024), TCS reported modest financial performance. On a year-on-year basis, the consolidated net profit increased by 5.98%, while revenue from operations grew marginally by 1.32%.

However, revenue in constant currency terms declined by 3.1% compared to the same quarter last year. Despite this, operating and net margins remained healthy at 24.5% and 20.1% respectively, with a strong cash conversion ratio of 100.3% of net income.

Profit before tax stood at ₹16,979 crore, reflecting a quarter-on-quarter growth of 3.52% and a year-on-year rise of 4.61%. Additionally, the board declared an interim dividend of ₹11 per equity share, with a record date of 16 July 2025 and payment scheduled for 4 August 2025.

What TCS’s Results Indicate About the IT Segment

Here is what TCS suggests about the current scenario of the IT segment:

• Narrowed Deal Momentum
  

TCS secured a total contract value of $9.4 billion in Q1 FY26, with $4.4 billion from North America and $2.5 billion from the BFSI sector. The figure represents a marginal decline from the previous quarter’s $10 billion.

Some of the notable contracts that the company secured include AI-led deals with Schneider Electric and platform modernisation agreements with ICICI Securities and Dhofar Insurance . However, the absence of mega-deals and the seasonal softness in new closures indicate that while demand exists, clients are prioritising cost optimisation and vendor consolidation over aggressive expansion.

• Conservative Hiring
  

TCS’s attrition rate stood at 13.8%, marginally above its comfort zone of 13%. The company added 6,071 employees year-on-year, bringing its total headcount to 6.13 lakh . However, hiring plans are now calibrated to demand visibility. The firm deferred wage hikes and introduced a policy requiring associates to be billable for at least 225 days annually . This shift reflects a strategic move to reduce bench strength and optimise resource utilisation.

While TCS plans to onboard 42,000 freshers in FY26 , the pace will depend on macro recovery. The cautious stance on hiring suggests that IT firms are bracing for prolonged demand volatility.

• AI and GenAI Adoption
  

TCS’s AI and Data unit delivered strong growth, with over 114,000 employees trained in advanced AI skills. The company expanded its WisdomNext platform with agentic AI capabilities and reported scaled GenAI deployments across industries. Demand was driven by SDLC automation, data platform modernisation, and enterprise transformation.

Not only that, but collaborations with Microsoft and Vianai also gained traction , showing a shift toward AI-led services. This reflects a broader industry trend where GenAI is becoming central to client engagements.

• Sector-Wide Sentiment
  

TCS’s Q1 miss triggered a 3.5% drop in its share price and dragged the Nifty IT index down by 2%. Infosys and Wipro also traded weak, reflecting investor concerns over sector-wide softness. The 3.3% sequential decline in constant currency revenue was sharper than the 1.4% projected by analysts .

This underperformance has led to a reassessment of IT sector valuations. Institutional investors are reducing exposure, with FII holdings in IT services at a 13-year low . The muted sentiment suggests that Tier-1 IT firms may no longer be viewed as reliable compounders.

• Geopolitical and Tariff Risks
  

TCS flagged global macroeconomic and geopolitical uncertainties as key factors inhibiting demand. The market is closely watching the impact of US President Donald Trump’s proposed tariffs on tech imports, which could affect client budgets across sectors.

Additionally, inflationary pressures and trade disruptions are prompting clients to re-prioritise spending. These factors have led to slower decision-making and deal deferrals, particularly in the BFSI, retail, and manufacturing sectors. The cautious outlook suggests that IT firms may face prolonged headwinds in international markets.

• Structural Shift
  

The Nifty IT index has declined 14% in 2025, making it the worst-performing sector. TCS shares are down 21% year-to-date, trading 30% below their 52-week high. HSBC warns that top-tier IT stocks are no longer five-year compounders and require active management around cycles and volatility . The sector’s structural transformation, driven by AI disruption and weak discretionary spending, has altered its investment profile. Technical indicators, such as the head and shoulders pattern in Nifty IT, suggest further downside risk.

Conclusion

TCS’s Q1 results for FY26 indicate that the Indian IT industry is transitioning into a new phase. The overall picture is not negative, but it is also far from the high-growth environment seen in the past. The company’s stable profit and moderate revenue growth reflect the careful spending patterns of global clients and a sector-wide shift in priorities.

Looking ahead, the IT industry will need to rely more on innovation and adaptability to meet the evolving needs of its clients. Companies will need to build deeper domain expertise, offer more value-driven services, and remain agile in managing their workforce. For now, the focus remains on stability, cost control, and aligning with long-term trends rather than chasing short-term growth.

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IT sector stocks in India: Can the growth momentum sustain in 2025?