Fresh year, no fresh start for India’s largest IT firms

**Kashish Kapoor** (0:04)
Today, I have two interesting stories. In the first one, I look at the quarterly results for the Indian large-cap IT firms, which is business as usual, with a pinch of salt. And in the second one, we'll look at the IndiGo's quarterly results, with respect to what happened primarily in the last quarter. Hello, and welcome to The Daily Brief Show by Zerodha, where our aim is to cut through the noise and bring you the biggest news in the financial markets in a way that's one level deeper as compared to other news channels. I'm your host, Kashish Kapoor. Today is Tuesday, 28th of July.
The past year for India's largest IT companies has been full of subtle nuanced changes in what they've said. For most of FI26, these companies bounced back from a week showing. But even in their return to form, AI has left plenty of factors that IT firms previously used to take for granted in the lurch. So yes, we often say each successive quarter that very little changes for a business or an industry. But when you zoom out and look at all the small things that have been said throughout all the quarters, you get to see some very interesting tensions in approaches across companies. So we start yet another financial year covering one of the most storied industries in India. We'll be looking at TCS, Infosys and HCL Tech this time. As always, Midcap IT firms will get a separate story. Right off the bat, the first quarter isn't short of being happening. For one, interestingly, after cutting jobs for a year, TCS has started hiring again. Then Infosys lowered its own growth target, and its total headcount fell more than it first appears once you separate out the people it gained by buying smaller companies.
HCL Tech's own business barely grew this quarter. Let's begin with the headline numbers. TCS Q1 revenue came in at $7.6 billion, a rise of 2.7% year-on-year. The operating margin came in at 24%, down 1.3 percentage points from last quarter, mainly on account of a company-wide pay raise. Their AI services revenue has reached an annualized run rate of $2.6 billion.
Infosys Q1 revenue grew by 2.8% in dollar terms, coming in at $5.08 billion.
Their operating margin held steady at 21% within the guidance of 20% to 22% that they've maintained all of last year. Their large deal value from the quarter came in at $3.6 billion, with 61% being net new business. AI will now make 8.2% of their total revenue, up from just 5.5% two quarters ago. HCL Tech's Q1 revenue came in at $3.65 billion, up 2.6% year on year. Their operating margin stood at 16.9%.
Their advanced AI revenue reached 171 million, up 62% year on year. Last quarter, we spent most of our coverage on understanding the deflationary effect of AI. The story is well known. AI shifts pricing power away from manpower-based billing to outcomes. This time, we may have some concrete numbers. AI is shrinking how much any single piece of work could be worth.
Clients now want more definitive outcomes in less time. That also means that a company now has to close more deals or bigger ones just to book the same total revenue as before. Last quarter, HCL Tech CEO C Vijay Kumar even put a number on this, saying his teams now need roughly 25-30% more effort to earn the same revenue they used to earn. This quarter, TCS frames the same pressure in the terms of pricing. How much of a saving gets handed to the client once a deal is signed? Their CEO put the number at 10-15% range. When TCS cuts prices this way, clients usually give it extra work in the same negotiation, a new project or a bigger scope. Of course, the bigger implication is that AI could shrink the entire IT services business worldwide by tens of billions of dollars. An analyst asked K. Krithivasan directly if TCS sees the scale of shrinkage coming. He said, no, and pointed to TCS own headcount, which grew this quarter as evidence if a collapse that large were actually happening. A company like TCS would likely be cutting jobs, not adding them. Infosys, meanwhile, stayed quiet on the number, although they did admit that they track the rate of AI-led deflation internally and won't be sharing it with public. They had the softest quarter of the three, admitting that demand was weaker than usual for this point in the year. That was partly because clients are pushing back harder on price, expecting productivity gains to be passed on to them. AI seems to be speeding up delivery once a deal is signed, but what about whether it shortened the time it takes to win that deal in the first place? There is, to a degree, an expectation that if AI has made making demos easier, then clients would ask to close a deal faster. But they haven't said much about that. However, interestingly, decision cycles in a certain deal has gotten longer. There is an AI component to it. Tech Mahindra and Wipro have both highlighted caution on the part of clients in terms of token costs. Does AI really get us as much benefit considering how expensive, enterprise-wide, Claude and Chad GPT can be?