Layoffs impact, visa fee, muted demand: TCS Q2 earnings key factors to watch out for

Introduction

Tata Consultancy Services (TCS), as India’s largest IT exporter, often serves as a bellwether for the health of the broader Indian IT services sector. As it approaches its Q2 FY26 result, several headwinds have converged: the firm is executing workforce reconfiguration (i.e. layoffs), the U.S. has imposed a sharp increase in H-1B visa fees, and client demand remains soft amid global macro uncertainty. Together, these forces may blunt upside surprises and put pressure on margins, making the upcoming earnings release and associated commentary unusually consequential.

In this essay, we examine each of these three stress points in turn, explore their interconnections, and highlight critical metrics and narratives to watch in TCS’s Q2 disclosures.

Layoffs and Workforce Restructuring

The rationale and scale

• TCS has announced that it plans to reduce its headcount by about 2 percent over the fiscal year, equating to around 12,000 employees globally.
• The layoffs are being pitched as a move to shed skill-redundant roles or those that cannot be redeployed, especially given rising pressures from AI, automation, and shifting client needs.
• Severance packages and restructuring costs will have a near-term impact, both in reported “one-time” line items and operational overheads.

Risks and signaling effects

• Morale, retention, and attrition: The way TCS handles the layoff process (transparency, fairness, redeployment) will affect internal morale and voluntary attrition in subsequent quarters. The Q2 earnings call may reveal whether attrition has spiked among non-impacted staff.
• Talent pipeline and capability gaps: Shedding staff in certain technical domains may create future capability gaps, especially if new skills (e.g. generative AI engineering, cloud, cybersecurity) are required.
• Investor reaction and confidence: Markets often react negatively to broad layoffs unless they are perceived as strategic and timely. TCS’s justification and forward guidance around hiring will be scrutinized.

What to watch in Q2 results

1. Number of employees let go in Q2 (vs plan), and associated costs.
2. Attrition statistics (voluntary vs involuntary) before and after layoffs.
3. Efficiency improvements or productivity gains claimed, and how they offset headcount cuts.
4. Any hint of further downsizing in H2 FY26 (i.e., whether 2% is the ceiling or floor).
5. The balance between cost savings and potential revenue loss or delays from over-pruning.

Visa Fee Hike and U.S. Visa Policy Headwinds

The new visa regime

• The U.S. recently instituted a $100,000 one-time fee for each H-1B visa application — a steep increase that materially changes the cost structure for firms that deploy talent to the U.S.
• TCS is historically one of the largest users of H-1B visas, though it has been reducing dependency over time, claiming that the share of employees on H-1B has fallen below 50% for its North America operations.

Financial impact and margin pressures

• Analysts estimate that the visa hike could shave 4% to 13% off sector earnings, assuming part of the increased cost cannot be fully passed to clients.
• Some believe that TCS and its peers may absorb much of the burden, leading to margin pressure rather than topline contraction.
• On the flip side, visa constraints may force TCS to source more talent locally in the U.S. or Europe, raising local hiring costs. That, in turn, could reduce offshore margins.

Strategic responses and narrative to watch

• Localisation / onshore mix: TCS may highlight plans to shift delivery models, increasing local hires in the U.S. or expanding “nearshore” or “local delivery center” models.
• Cost absorption vs pass-through: How much of the visa cost can be passed to clients (via contract renegotiations or pricing) will be a key debate.
• Visa backlog, delays, or rejection risk: Any commentary on visa issuance delays, risk of rejection, or strategy to mitigate these (e.g., by pre-filing, using other work visa routes) will matter.
• Impact on deal geography / client mix: If visa constraints make U.S. deployment difficult, TCS may lean further into non-U.S. geographies (Europe, Latin America, APAC).

Muted Demand and Weak Client Spend Cycles

Macroeconomic and sectoral constraints

• The broader context is one of cautious corporate spending, especially for discretionary tech projects, amid global inflation, interest rate pressures, and policy uncertainty (including U.S. tariffs).
• Several industry verticals — such as manufacturing, retail, auto, and communications — continue to show softness, while BFSI and hi-tech are relatively more resilient.
• The ER&D (engineering, R&D) vertical is expected to remain under particular pressure, as clients delay capex and large development projects.

Revenue growth outlook

• Most brokerages forecast flat to modest sequential revenue growth for Q2 in constant currency (0–2 percent), with the possibility of slightly better performance in mid-tier firms versus tier-one giants like TCS.
• TCS’s own growth estimate is in the ballpark of 0.2–1 percent sequential in cc terms, driven by moderate gains in international business and a flat domestic business.
• That said, strong deal wins (e.g. a reported $640 million contract in Q2) may provide a cushion, though conversion from win to revenue will be gradual.

Margin pressures and levers

• Margins are expected to be under range-bound pressure, due to wage hikes, lower utilisation, restructuring costs, and higher investments in AI / automation.
• The depreciation of the Indian rupee versus the dollar may provide some cushion to margin erosion.
• Efficient delivery (offshore leverage, pyramid optimization), productivity gains from AI/automation, and cost control will be critical margin defense strategies.
• Pricing power remains under threat: as AI/automation raises productivity, clients may resist paying commensurate price increases, potentially squeezing vendor margins.

What to watch in Q2 results

1. Organic growth vs deal-driven growth (i.e., how much growth came from existing clients vs new wins).
2. Book-to-bill (order intake) and commentary on ramping newly won deals.
3. Utilisation and bench levels: whether TCS is able to absorb the layoffs without rising bench costs.
4. Vertical and regional growth breakups — pinpointing areas of resilience or weakness.
5. Commentary on client behaviour: do clients delay projects? Demand hesitancy?
6. Impact of AI and automation: whether TCS is already seeing deflationary pressures in renewals or lower billing rates due to productivity gains.

Interplay Among the Three Factors and Strategic Implications

These three risk factors — layoffs, visa policies, and weak demand — are interconnected, not independent:

• Layoffs are a cost response to revenue pressure; success depends on whether the cuts harm future growth or capabilities.
• Visa fee hikes increase the cost of delivering services to U.S. clients, putting further stress on margins already under pressure from muted demand.
• Weak client demand limits pricing power; it also forces greater reliance on internal levers (e.g. workforce flexibility, automation) to protect margins.

From a strategic lens, TCS must navigate the tightrope of cost discipline without undermining future growth potential. Its success will depend on how convincingly it can tell the story of transformation — not just cost cuts. Investors will look for credible pathways around visa risk, AI-based differentiation, and sustainable demand recovery.

Conclusion and Key Watch-Outs

As TCS unveils its Q2 FY26 results, the spotlight will likely be on narrative, not just numbers. The market may not expect a breakout quarter, but its reaction will hinge on how the company frames its response to external shocks.

To summarise, key metrics and narrative signals to watch:

• Layoff data, severance cost, attrition trends, and further restructuring plans
• Deal wins, order backlog, and speed of conversion to revenue
• Margin trajectory, cost absorption strategies, and offshore vs onshore mix
• Commentary on visa constraints: local hiring, pass-through, visa backlog risk
• Insights into client demand trends, vertical / geographic segmentation, and shifting client behavior
• AI / automation strategy, productivity gains, and pricing dynamics