What do TCS results say about the future of its share price?

Tata Consultancy Services (TCS) is a leading global IT services, consulting and business solutions company. It's the largest IT company in India with a presence in 55 countries. TCS is seen as the crown jewel of the Tata group. It’s a cash-generating machine that regularly generates more cash than its net profit. It’s also a dividend paymaster. The company pays dividends every quarter, which makes it attractive for investors who seek regular income. The company serves clients are some of the biggest firms in the world – Google, Amazon, Azure, Openstack, Adobe, Intel, Bosch, IBM, Apple, Oracle, Symantec, etc. It has a workforce of over 610,000 in 180 service delivery centres across 55 countries in six continents. The company recently declared its first quarter results for FY26. The stock market’s reaction to the results was negative. In fact, the stock has been under pressure for nearly a year. June 2025 quarterly results The company’s revenue in the quarter was $7,421 million, a decline of 1.1% YoY and 3.1% YoY decline in constant currency terms. Operating profit did improve marginally on a sequential basis to 24.5%. This stable operating performance helped the net profit grow to $1.5 billion, up 3.5% YoY, with a net margin of 20.1%. The profit also got a boost due to one-offs like tax benefits and cost savings due to the winding down of a large project. The company generated about $1.5 bn in cash from operations which was 100.3% of the net profit. The headcount increased slightly by 6,071 taking the total to 613,069 at the end of the quarter. The IT services employee attrition rate – a closely tracked metric – was 13.8%. The company paid a dividend of ₹11 per share. The record date and payment date for the same are16 July and 4 August respectively. The total contract value (TCV) was $9.4 bn, down from $12.2 bn in the last quarter. What did the management say? CEO and managing director, K. Krithivasan said, "The continued global macro-economic and geo-political uncertainties caused a demand contraction. On the positive side, all the new services grew well. We saw robust deal closures during this quarter. We remain closely connected to our customers to help them navigate the challenges impacting their business, through cost optimization, vendor consolidation and AI-led business transformation" Essentially, the company faced serious challenges due to the ongoing trade and tariff tensions, along with geopolitical tensions as well. This resulted in a negative impact on revenue growth. The main area of weakness was in the US and Europe. The demand slowdown was not restricted to one or two specific industries. At the same time, the company was able to sign new deals with clients and is still seeing good demand for its services, especially the new services related to AI and cyber security. AI-related services to lead revenue growth TCS has been investing heavily in AI for a long time. It has trained its employees in various AI-related technologies over the years, in anticipation of a surge in client demand. As per HR head, Milind Lakkad, TCS now has over 114,000 employees with higher order AI skills. And the company is seeing its efforts bear fruit. Aarthi Subramanian, Executive Director - President and Chief Operating Officer said this… “Across industries, clients are increasingly shifting their focus from use case based approach to ROI led scaling of AI. We are investing across the AI ecosystem including infrastructure, data platform solutions, AI agents and business applications. Launching TCS SovereignSecureTMCloud, TCS DigiBOLTTM, and TCS Cyber Defense Suite, to accelerate India’s AI led transformation was a particular highlight of this quarter". Why was the market disappointed? The stock market is concerned about the slowdown in revenue growth due to macro factors beyond the company’s control. The management has highlighted this issue in the past as well. However, the company has not been able to find a solution to the problem. Growth has been sluggish for the last few quarters. In FY25 the company’s revenue was up only 6% YoY. The market is concerned that the period of slow growth will continue in the near future. Worse, the management is not in a position to say when the period of slow growth will end. Should investors worry? Long-term investors need not worry about short-term issues facing any company as long as the company is on the right track. However, if the cause of concern itself is long-term in nature, then investors may have to rethink their investments. In the case of TCS, there is nothing fundamentally wrong about the company. It’s a debt free, cash rich company, with strong margins, cash flow generation, and dividend payout. The problem is only in the topline growth, which in turn is directly tied to the slowdown in technology spending in the western world. Partly this is explained by macro factors but the widespread use of AI is also playing its part. TCS has invested considerable time and money to get the entire workforce AI ready so as to be prepared for this disruption. The company’s future revenue growth will depend a lot on how it fulfils the demand for AI-related services in the face of intense competition. And that will decide the future of the company’s stock price. Investors should look beyond just yields and evaluate whether these companies align with their broader financial goals and risk appetite. Happy Investing. Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. This article is syndicated from Equitymaster.com.