TCS and HCLTech Surpass Q3 Revenue Expectations
India's leading IT services firms, Tata Consultancy Services and HCL Technologies, kicked off the October-December earnings season with a positive surprise. Both companies exceeded analyst revenue forecasts, demonstrating resilience in a challenging environment.
Revenue Performance Exceeds Projections
TCS reported quarterly revenue of $7.51 billion. This figure represents a slight decline of 0.4% compared to the same period last year. However, it shows a modest sequential growth of 0.6%. The result surpassed the Bloomberg poll expectation of $7.43 billion from 32 analysts.
HCLTech posted even stronger growth. The company achieved $3.79 billion in revenue for the third quarter. This marks a solid 7.4% increase year-on-year and 4.1% growth from the previous quarter. It also beat the Bloomberg estimate of $3.7 billion.
Profit Figures Show Mixed Trends
TCS reported a net profit of $1.5 billion for the quarter. This represents a 3.1% increase from the same period last year and a 2.7% rise sequentially.
HCLTech's profit picture was more complex. The company recorded $537 million in net profit. This figure fell 1.3% compared to the previous year but showed a strong 10.5% increase from the preceding quarter.
Sources of Growth Diverge
The two companies achieved their revenue growth through different channels. More than half of TCS's incremental revenue came from European clients. These clients now account for nearly one-fifth of the company's total business.
HCLTech's growth story centered on software products and licenses. More than three-fifths of its growth originated from this segment, which contributes 11% to its overall business.
Labor Code Changes Squeeze Margins
Despite the revenue surprises, profitability faced significant pressure. Recent changes to government labor codes mandated that basic pay must constitute at least 50% of total employee compensation. This increased statutory payouts like provident fund and gratuity.
The impact was substantial. Together, TCS and HCLTech incurred nearly $350 million in additional costs during the December quarter. TCS alone faced $238 million in extra costs, while HCLTech dealt with $109 million. These expenses directly squeezed operating margins.
Demand Environment Shows Contrasting Views
Both companies reported generally strong demand, but their outlooks differed in tone. TCS Chief Executive K. Krithivasan noted that demand continues to improve compared to earlier quarters. The company is focusing on short-cycle projects with faster decision-making and clearer returns.
HCLTech's leadership sounded more cautious. Chief Executive C. Vijayakumar pointed to persistent global market uncertainty slowing spending growth. However, he emphasized that fundamental demand for technology-driven business transformation remains strong.
Full-Year Guidance Adjustments
HCLTech revised its full-year revenue growth guidance. The company lowered the upper end of its forecast to 4.5% from the previously outlined 5%. The new range stands at 4-4.5%.
TCS maintains its practice of not providing specific quarterly or annual revenue guidance. However, the company's commentary about international revenue growth has softened from earlier confident projections to current aspirations.
Additional Cost Factors Emerge
TCS faced additional financial burdens beyond labor code changes. The company incurred $350 million in costs related to two specific issues. These included the government's new labor regulations and a provision for a legal claim. The legal matter involves allegations of trade secret misappropriation from Computer Sciences Corporation.
Revenue Composition Shifts
TCS experienced notable changes in its revenue streams. Revenue from banking and financial institutions declined 0.4% sequentially to $2.39 billion. Meanwhile, revenue from India operations jumped 5.8% sequentially to $458 million, surprising analysts who expected delays in government deals.
Fiscal Year End Scenarios Differ
The two companies face contrasting challenges to complete the current fiscal year. TCS needs $7.78 billion in fourth-quarter revenue to match last year's total of $30.18 billion. Achieving this requires 3.65% sequential growth, which would be the company's fastest pace in five years.
HCLTech's path appears more straightforward. The company needs $2.86 billion in the final quarter to reach last year's revenue of $13.84 billion. Missing this target would require an unusual double-digit sequential decline.
AI Revenue Metrics Shared
Both companies provided insights into their artificial intelligence revenue streams. HCLTech reported $146 million in AI revenue for the quarter, bringing its total to $246 million. The company was the first among India's top five IT firms to share such metrics last October.
TCS disclosed $1.8 billion in annualized AI revenue. This represents a 17.3% quarterly increase in constant currency terms. The company first quantified its AI revenue in December, reporting $1.5 billion as of September 2025.
Operating Margin Pressures
Margin concerns persisted for both organizations. TCS maintained its operating margin at 25.2%, unchanged from the previous quarter. HCLTech reported 18.6% operating margins, representing a 110 basis point improvement.
HCLTech's margin improvement was partly driven by software product sales, which involve lower costs due to reduced human billing requirements. However, these figures do not include the $109 million impact from labor code implementation.
Workforce Adjustments Continue
Both companies reduced their employee counts during the quarter. TCS cut 11,151 positions, ending with 582,163 employees. This marks the fourth consecutive year of third-quarter headcount reductions. The cuts primarily resulted from layoffs announced last July affecting middle and senior employees who couldn't be reskilled.
HCLTech made smaller adjustments, reducing headcount by 261 employees to reach 226,379 total staff.
Industry Analysts Weigh In
Industry observers noted the companies' strategic positioning. "Despite sector-wide challenges such as economic uncertainty and talent retention, HCLTech's strategic focus and investments in next-generation technologies position it well to support clients' evolving needs," said Shubham Rathore, principal analyst at Gartner.
Financial analysts highlighted specific concerns. "The impact of labor codes and the legal claim were negative surprises to profitability," noted Karan Uppal, vice-president at Phillip Capital.
The IT sector continues navigating complex conditions. While demand remains generally healthy, cost pressures and global uncertainties create ongoing challenges for even the strongest performers.
