TCS, HCLTech deliver Q3 revenue surprise amid labour cost headwinds
Both Tata Consultancy Services (TCS) and HCL Technologies beat analysts’ revenue estimates. TCS reported revenue of $7.51 billion for the quarter, down 0.4% year-on-year and up 0.6% from the previous quarter. In a Bloomberg survey of 32 analysts, revenue was expected to be $7.43 billion.
HCLTech reported revenue of $3.79 billion in the third quarter. Bloomberg’s The estimate is 3.7 billion dollars, and a growth of 7.4% on an annual basis and 4.1% compared to the previous quarter is expected.
More than half of TCS’s incremental revenue comes from European customers, who account for almost a fifth of the company’s business, while more than three-fifths of HCLTech’s growth comes from software products and licenses account for 11% of its business.
In terms of net profit, TCS generated $1.5 billion, up 3.1% y-o-y and 2.7% sequentially, while HCLTech’s profit was $537 million, up 10.5% from the previous quarter, with a decline of 1.3% y-o-y.
Despite the revenue surprise and healthy profit figures, profitability remains under pressure due to changes in the government’s labor laws, which mandate that the basic pay for employees constitute at least 50% of the total remuneration, thereby mandating the increase of statutory payments such as provident fund and gratuity.
As a result, the two companies incurred additional costs of approximately $350 million in the December quarter; of which $238 million was for TCS and $109 million was for TCS. HCLTech—tightening margins.
Demand remains, visibility differs
On the bright side, both companies said demand remained strong, although HCLTech appeared more cautious.
“We had stated that in the second quarter (July-September 2025), the overall demand environment improved compared to the first quarter, so this trend continued in the third quarter as well,” TCS CEO K. Krithivasan said in the company’s post-earnings conference call with analysts on Monday.
He said the company focuses on short-cycle projects where decision-making is faster and returns are clearer. “We’re seeing a steady increase (in such projects) and you can see that reflected in our reported revenue, and that’s true across all industry segments,” Krithivasan said.
Meanwhile, C. Vijayakumar, CEO of HCLTech, pointed out that the ongoing uncertainty in the global market has slowed down the spending growth. But “underlying demand for technology as a driver for business transformation remains structurally intact,” Vijayakumar said at the company’s post-earnings press conference on Monday.
Discretionary spending is emerging in new pockets, he added, and the company’s “focus is on proactively identifying where new spending is occurring and targeting those opportunities.”
HCLTech lowered the upper end of its full-year forecast to 4-4.5% from 3-5% in October.
“Despite industry-wide challenges such as economic uncertainty and talent retention, HCLTech’s strategic focus and investments in next-generation technologies position it well to support customers’ changing needs and drive sustainable growth in a dynamic market,” said Gartner principal analyst Shubham Rathore.
TCS, which did not provide quarterly or full-year revenue forecasts, reiterated expectations for higher international revenue this year but softened the tone of the comment.
In April last year, the company, which generates more than 94% of its revenue from overseas markets, had said it was “confident” that international business would grow faster in the current financial year than in 2024-25, but on Monday Krithivasan said this now remained a “target”.
In addition, TCS incurred $350 million worth of costs in the third quarter from two accounts—government labor laws and legal claim provisions arising from a lawsuit filed against the company by Computer Sciences Corporation alleging misappropriation of trade secrets.
“The impact of labor laws and legal claims were negative surprises to profitability,” said Karan Uppal, vice president of Phillip Capital. “While the decline in revenue from BFSI was a concern, the growth in the India business was surprising due to the postponement of the BSNL deal.”
TCS’s revenue from banks and financial institutions decreased by 0.4% to $2.39 billion, respectively. On the other hand, its revenue from India increased by 5.8%, respectively, to $458 million.
Different math for FY26 end
Both companies are looking at different ends of the current financial year.
TCS finished the first nine months of FY26 with revenues of $22.4 billion; That means it needs $7.78 billion to cover last year’s $30.18 billion in revenue. This will require the company to report sequential growth of 3.65%, the fastest growth in five years.
The task of surpassing last year’s revenue growth is relatively simpler for HCLTech, which needed $2.86 billion in the fourth quarter to offset last year’s $13.84 billion in revenue. To miss this, the company would have to report a double-digit sequential revenue decline in the fourth quarter.
While both companies have had different destinies, they have something in common as they are among the only companies among the top five companies that share AI metrics. HCL reported revenue of $146 million AI brings its total to $246 million. The company became the first of the top five companies to share their AI metrics in October last year.
TCS, on the other hand, reported $1.8 billion in revenue from its AI services, up 17.3% year-on-year in constant currency terms. On December 17, TCS measured its AI revenue for the first time and stated that it was generating $1.5 billion in annual AI revenue by September 2025. However, the IT outsourcing provider did not specify how it defines AI-related revenue for now.
Both companies said that while adoption of AI agents has been slow, automation will take center stage in the current calendar year.
“Technology spending continues to focus on validated solutions and simplified architectures. AI adoption is increasing with sound governance and regulatory compliance, but agency AI implementation is proceeding cautiously,” Krithivasan said.
Margin issues
The main cause of concern for both companies was operating margins. While TCS’s operating margin remained unchanged at 25.2% from the previous quarter, HCLTech reported a 110 basis point increase in operating margin at 18.6%.
A large portion of HCLTech’s margins came from selling software products that cost less because there was no human billing. But operating margins don’t take into account the $109 million in costs from enforcing labor laws.
In terms of people, TCS has made cuts In the last quarter, the number of employees increased by 11,151 people and reached 582,163 employees. This marks the fourth consecutive year the company has reduced headcount in the third quarter and the third time in FY26.
Much of this was due to layoffs announced in July last year, when the company announced it would give marching orders to 12,200 mid- and senior-level employees who could not be qualified.
HCLTech reduced its headcount by 261, with 226,379 employees employed by the end of last year.
