Tata Consultancy Services’ (TCS) plan to lay off nearly 2 percent of its workforce is raising concerns across the IT sector, with Jefferies warning that the move may signal deeper troubles. The brokerage said the layoffs could lead to near-term execution slippages and long-term attrition risks, reflecting weak underlying demand conditions. Jefferies believes the cost-cutting trend, coupled with AI-driven productivity demands, may push other IT firms to take similar measures, especially if they fail to win market share.
Layoffs Part of Larger Restructuring Effort
According to Jefferies, TCS’ decision to let go of around 12,000 employees in FY26 is part of a broader restructuring initiative aimed at making the company “future-ready.” The move is expected to affect mostly mid- and senior-level employees facing skill mismatches. While TCS has stated that it is realigning its workforce and investing in capability-building, Jefferies cautioned that such restructuring could dampen employee morale and signal margin pressure in an already muted growth environment.
Jefferies noted that this is the third such cost-focused move by TCS in just three months, following the deferral of wage hikes in April 2025 and the introduction of strict benching guidelines in June that limited non-billable periods to 35 days a year. While TCS has historically maintained lower attrition rates by offering long-term stability, Jefferies warned that recent changes could erode employee trust and replicate the attrition surge witnessed at Cognizant between 2020 and 2022.
Sector-Wide Headwinds Intensify
The layoffs, Jefferies said, also underscore broader sectoral challenges. Since FY22, the IT industry has seen weak net hiring due to prolonged demand moderation. Most new deals are driven by cost-optimisation, with clients demanding AI-led productivity gains. Jefferies explained that firms must either gain wallet share by doing more with the same workforce or execute the same work with fewer people. In a sluggish demand environment, this often leads to layoffs, as redeploying benched employees becomes difficult.
Jefferies highlighted that companies with slower growth are already operating at higher utilisation levels, which means thinner benches and limited room to absorb displaced staff. In contrast, IT players with stronger growth outlooks still have room to maneuver, making them better positioned in the current cycle.
Given these dynamics, Jefferies maintained a cautious stance on the sector and recommended a selective approach to IT stocks. Among large caps, it prefers Infosys and HCL Technologies, noting that HCLTech now presents itself as a strong alternative to TCS. Despite similar price-to-earnings (PE) multiples, HCLTech offers a more promising growth trajectory and comparable free cash flow conversion. Among mid-caps, Jefferies favours Coforge and Mphasis due to their relatively resilient outlook and execution capabilities.
In conclusion, Jefferies views TCS’ restructuring as more than just a company-specific measure. It signals a strategic pivot in response to sector-wide shifts, where cost pressures, AI-driven efficiencies, and subdued demand are rewriting workforce dynamics. While the sector is not without opportunity, Jefferies advised investors to remain selective and favour IT firms with stronger fundamentals and more sustainable growth strategies.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
