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Weak quarter; macro uncertainty weighs on growth

TCS’s Q1FY26 operating performance was weaker than our expectation. Revenue declined 0.6% QoQ (-3.3% CC) to USD7.42bn, below our estimate, impacted by the ramp-down in BSNL deal, delays in decision-making and project commencement with respect to discretionary investments amid elevated macro uncertainty. BSNL deal’s ramp-down impacted growth by 2.8%, while international revenue declined 0.5% QoQ in constant currency (CC). EBITM expanded 30bps QoQ to 24.5%. Deal wins remained steady at USD9.4bn (bookto-bill: 1.3x) and a tad above the management’s guided comfortable range of USD7-9bn per quarter. The company observed a trend of project deferrals, scope reduction, and decision delays which was intensified to some extent in Q1, resulting in less-than-expected revenue conversion. The management reiterated that international market revenue growth would be better in FY26 vs FY25 and highlighted that if macro improves with no further delays, Q2 could turn out better than Q1. We trim our earnings estimate by ~1.5% for FY27/FY28, factoring in the Q1 performance. We retain ADD with TP of Rs3,500, at 23x Jun-27E EPS.

Results summary

Revenue declined 0.6% QoQ (down 3.3% QoQ in CC) to USD7.42bn. EBITM expanded 30bps QoQ to 24.5%, a tad above our estimate, supported by lower third-party expenses (+70bps) and currency tailwinds, though partially offset by lower utilization. Cost of equipment and software licenses decreased ~USD232mn QoQ which partly indicates BSNL deal’s ramp-down. Among geographies, North America, the UK, Continental Europe, and APAC saw increases of 0.4%, 6.5%, 4.3%, and 3.1% QoQ, respectively (in USD terms), while India saw a decline of 31.4% QoQ. Revenue decline in India is largely owing to the ramp-down in the BSNL deal. Headcount grew 0.8% QoQ to 613,069. Attrition inched up to 13.8%, from 13.2% in Q4FY25. TCS has announced an interim dividend of Rs11/share. What we like: Strong deal intake, steady cash conversion. What we did not like: Revenue miss, weak revenue conversion.

Earnings call KTAs

1) The deal pipeline continues to remain healthy and well distributed across verticals and geographies. 2) BFS clients are cautious with investments due to macro uncertainty; US insurance continues to remain soft, while Europe is doing well. Discretionary spends remain under pressure. 3) MedTech faces regulatory scrutiny, shifting demand patterns, cost pressures, and regional consolidation. 4) Consumer remains the most impacted vertical, driven by funding delays, project postponements, and delayed milestone completions. 5) Enterprises in CMT are re-evaluating their priorities with key focus on AI, automation, cost optimization, and vendor consolidation 6) Manufacturing remains subdued due to challenges and reduced spending in Auto. Clients are focused on lowering tech debt and preparing infrastructure for future demand. 7) Spending and capital investment in ERU is down amid policy changes and geopolitical tensions 8) Across industries, clients are increasingly shifting their focus from use casebased approach to RoI-led scaling of AI. 9) Deal wins were steady at USD9.4bn (book-to-bill ~1.3x) in Q1 (excluding the BSNL APO). 10) Enterprises are moving beyond pilots to production-grade GenAI rollouts, focusing on AI-led business transformation, AI-enabled SDLC, and data platform modernization. 11) TCS is expanding its AI platform (TCS WisdomNext) with agentic AI capabilities and strengthening partnerships with hyperscalers and native AI and data companies. It is investing across the AI ecosystem, including infrastructure, data platform solutions, AI agents, and business applications. 12) Customer spend is clustering around three big themes (a) AI-led business transformation, (b) AIenabled SDLC/IT operations, and (c) data platform modernization that supports agentic AI. 13) TCS has over 114,000 people with higher order AI skills. 14) The company is recalibrating its hiring based on the demand outlook and will decide on wage hike for FY26 based on the macro environment.

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