TCS, HCLTech deliver Q3 revenue surprise amid labour cost headwinds

Core Insights - India's top IT services firms, including Tata Consultancy Services (TCS) and HCL Technologies, reported stronger-than-expected earnings for the October-December quarter despite rising costs due to new wage norms impacting profitability [1][6]. Financial Performance - TCS reported revenue of $7.51 billion, a decrease of 0.4% year-on-year but an increase of 0.6% from the previous quarter, surpassing analyst expectations of $7.43 billion [1] - HCLTech achieved revenue of $3.79 billion, exceeding Bloomberg's estimate of $3.7 billion, with a year-on-year growth of 7.4% and a quarter-on-quarter increase of 4.1% [2] - TCS's net profit was $1.5 billion, up 3.1% year-on-year and 2.7% sequentially, while HCLTech's profit was $537 million, down 1.3% year-on-year but up 10.5% from the previous quarter [5] Revenue Sources - More than half of TCS's incremental revenue came from European clients, who represent nearly 20% of its business, while over 60% of HCLTech's growth was driven by software products and licenses, which account for 11% of its business [5] Cost Pressures - Both companies incurred nearly $350 million in additional costs in the December quarter due to new labor codes, with TCS facing $238 million and HCLTech $109 million, which has pressured their margins [7][20] Demand and Market Outlook - Demand for IT services remains strong, with TCS's CEO noting an improvement in the overall demand environment [8] - HCLTech's CEO expressed caution regarding slow spending growth due to global market uncertainties, although he acknowledged the fundamental demand for technology remains intact [10] Guidance and Future Projections - HCLTech lowered its full-year revenue growth guidance to 4-4.5% from the previous 3-5% [11] - TCS did not provide specific revenue guidance but indicated aspirations for higher international revenue, although the tone has softened compared to previous statements [12] AI and Automation - HCLTech reported $146 million in revenue from AI, totaling $246 million, while TCS reported $1.8 billion in annualized AI revenue, reflecting a 17.3% quarterly increase [17][18] - Both companies emphasized the importance of automation and AI in their future strategies, despite cautious adoption rates [19] Employment Trends - TCS reduced its workforce by 11,151 employees, marking the fourth consecutive year of headcount cuts in the third quarter [21] - HCLTech also reduced its headcount by 261, ending the year with 226,379 employees [21]