Tata Consultancy Services (TCS) has snapped a prolonged dry spell for large contracts by securing a mega deal valued at over $1 billion from Telefónica UK, the British arm of the Spanish telecommunications giant. This 10-year agreement marks a significant win for India's largest software services exporter, which had not announced a deal of this scale for nearly two years.
A Strategic Win Amidst Slowing Growth
The contract with Telefónica UK, which operates the O2 mobile network in Britain, involves application and infrastructure services. According to executives familiar with the matter, much of this work is new for TCS. A formal announcement of the deal is anticipated in the coming weeks.
This victory is the fourth billion-dollar-plus deal secured under the leadership of Managing Director and CEO K. Krithivasan, who assumed office in June 2023. All four major contracts have originated in the UK, TCS's second-largest market after the US, contributing roughly 17% to its annual revenue. The previous mega deals include a $1.1 billion pact with the UK's National Employment Savings Trust (June 2023), a $1 billion digital transformation contract with Jaguar Land Rover (September 2023), and a massive $2.5 billion, 15-year administration contract with Aviva (January 2024).
Margin Pressures and a Shift in Strategy
However, this win comes with a caveat. Executives indicate that the profitability of the Telefónica UK deal is lower than TCS's overall operating margin of 24.2%. This represents a notable strategic shift for the IT major, which has traditionally been reluctant to accept contracts that dilute its company-wide profitability.
This is the second telecom deal impacting margins, following the $1.83 billion contract with state-run BSNL in India for 4G network deployment. Analysts, however, view this move as a calculated trade-off. Phil Fersht, CEO of HFS Research, interprets it as TCS prioritizing predictable, long-term growth and strategic account control over short-term margin optimization. He notes that such contracts often become more profitable in later years as transformation benefits accumulate.
Trailing Peers in the Mega-Deal Race
The Telefónica UK deal arrives at a critical time when TCS's growth momentum has slowed, with annual revenue growth dipping to 4.1% in FY24 and 3.78% in FY25. A key reason has been its inability to secure large contracts at the same pace as its rivals.
While TCS faced a drought, competitors were active: Infosys won a $1.7 billion deal with Liberty Global and a $1.6 billion contract with the UK's NHS. Cognizant bagged a $1 billion healthcare IT transformation deal, and HCLTech secured a $2.1 billion managed services contract with Verizon. TCS also lost several significant accounts, including Zurich Life Insurance to DXC Technology and the NHS deal to Infosys.
This competitive pressure is prompting TCS's management to pursue mega deals more aggressively, even at the cost of near-term profitability, as per an executive cited in the report. The Telefónica UK contract, largely spearheaded by former UK and Ireland head Amit Kapur before his move to lead AI and services transformation in August, is seen as a necessary win.
Future Outlook and New Avenues
Despite this major contract, analysts remain cautious about TCS's immediate revenue trajectory. Kotak Institutional Equities and Motilal Oswal Financial Services both project a revenue decline for TCS in FY26, citing the lack of large-ticket deals. The Telefónica contract, while sizable, adds only about $100 million in incremental revenue annually, or roughly 0.3% growth if no other business is lost.
Concurrently, TCS is exploring new growth frontiers beyond traditional IT services. The company has embarked on an ambitious plan to invest over $6.5 billion in building data centres with a 1-gigawatt capacity over six years. A recent move includes a $1 billion joint investment with TPG for a data centre in Navi Mumbai, led by Deepesh Nanda through the newly formed subsidiary HyperVault AI Data Centre. This initiative aims to position TCS as a world-leading AI-led technology services provider.
The Telefónica UK deal, therefore, is more than just a revenue number. It is a strategic play to regain momentum in large deals, solidify its presence in a key market, and fund its transition into next-generation technology infrastructure, even if the journey involves navigating near-term margin pressures.
