TCS' decision to lay off nearly 12,000 employees may lift margins

Firm's operating margin has remained below target for five consecutive quarters

Tata Consultancy Services’ (TCS’) decision to lay off roughly 12,000 employees, primarily mid- to senior-level managers, is being viewed by analysts as a move to shore up profitability rather than a shift towards an AI-driven future. 

While the company cited evolving business needs and future readiness as reasons, industry experts say the action is a cost-cutting measure aimed at improving operating margins that have remained below the firm’s aspirational range despite multiple efforts. 

The announcement on Sunday came as a surprise to many in the Indian information and technology (IT) sector, where involuntary layoffs have typically been handled quietly. Indian IT companies, as some of the country’s largest organized-sector employers, have historically avoided large-scale public cuts. The sector employs around 6 million people, according to the data from Nasscom. 

TCS’ operating margin has hovered between 24 per cent and 25 per cent for five consecutive quarters, below its stated aspiration of 26 per cent to 28 per cent. For the quarter ended June 30, operating margin stood at 24.5 per cent, down 20 basis points from a year earlier. The figure excludes wage hikes that TCS indefinitely deferred in April. 

“I thought the demand was just coming back,” said a senior analyst at a global brokerage firm, speaking on condition of anonymity. “This is a pure cost take-out strategy to lift margins, and once done, they may provide wage hikes to the remaining.” 

During a post-earnings call after Q1FY26 results, Chief Financial Officer Sameer Seksaria told analysts the company had been witnessing a discrepancy between demand and capacity. “In this quarter as well, we have invested in capacity… That is what is reflecting in our margins,” he said. That “excess capacity” largely refers to bloated mid-senior and senior layers of employees with experience between 9 years and 13 years, and 13 years and 17 years. According to staffing firm Xpheno, the top seven Indian IT firms employ about 492,000 professionals in those bands, compared with 486,000 at the junior end (from fresh graduates to five years of experience) — a group that draws significantly lower pay. 

A lot of those people were hired during the peak of the pandemic in FY21 and FY22, according to analysts. TCS hired 103,546 in FY22; the top five players cumulatively took in 273,377, the most in at least six years. Hiring has been going down ever since.

Persistently weak and uncertain macroeconomic conditions may have prompted TCS to act this time. Revenue growth in constant currency terms had steadily declined — from 15.4 per cent in FY22 to just 4.2 per cent in FY25. “Demand has been down and margins have missed expectations,” said Gaurav Vasu, founder of consultancy UnearthInsights. “Also, many employees lack the client-relevant skills today. Roles like project managers, infrastructure support, and other support functions are now particularly vulnerable. There could be more slow, silent layoffs across the industry.” 

The financial impact of the layoffs on TCS’ margins remains unclear. The company did not respond to a questionnaire sent by Business Standard on Sunday. 

TCS’ challenges on both margins and top-line growth have weighed on its stock. Its share price has dropped nearly 30 per cent over the past year. In comparison, Infosys is down 19.3 per cent, HCL Technologies 10.3 per cent, Wipro 4.7 per cent, and Tech Mahindra about 6 per cent. 

Industry veterans, though, supported TCS’ action. Ganesh Natarajan, executive chairman, of GTT Solutions said TCS is doing the right thing by taking proactive action. “Because there is no doubt that companies who will succeed in IT and non-IT with AI will have to move beyond GenAI and ChatGPT to a much more fundamental game changing use of AI. This fundamentally means more use of agenticAI, autonomous agentic AI..in this context the traditional style of pyramid will disappear. This restructure and rethink is important,” he added. 

Earlier this month, TCS posted one of its weakest first-quarter results since 2020, with constant currency revenue shrinking 3.1 per cent and dollar revenue down 1.1 per cent. It was the worst constant currency performance among the top five Indian IT service providers in the quarter.