Add TCS Ltd for the Target Rs.2,600 by Emkay Global Financial Services Ltd
TCS’s 2Q operating performance was softer than our expectations. Revenue grew 0.2% qoq (0.5% CC) to $7.6bn. EBITM was flat qoq at 24%, largely due to higher investments. Deal wins were steady at $9.6bn (book-to-bill of 1.3x), excluding the recently signed deals with MHP and BestBuy. AI revenue in 2Q stood at ~$775mn (~10% of revenue; up 19% qoq), driven by accelerated enterprise deployments. The management indicated that demand environment has not materially changed sequentially, with discretionary programs lacking near-term value remaining under scrutiny. TCS continues to strengthen capabilities through acquisitions and investments in frontier AI partnerships, talent, and new growth engines such as data center services, GCCs, mid-market, and sovereign cloud, which would weigh on margin in the near term. The management retains its long-term aspirational margin range of 26-28%, factoring in anticipated gain from growing share of AI revenue, which operates at better margins, uptick in revenue growth driving operating leverage, and cost optimization. We cut earnings estimates by 0.6% to 1.6% for FY27-29, factoring in 2Q performance, lower margin assumptions, and M&As (Best Buy’s India GCC and MHP). We retain ADD and TP of Rs2,600 at 16x Sep-28E EPS
Results summary
Revenue was up 0.2% qoq (0.5% CC) at $7.6bn, a tad below our estimate. EBITM was flat sequentially at 24.0%, below our estimate of 24.5%, due to higher subcon expenses and targeted investments, offset by currency benefits and operational efficiency. Order book TCV stood at $9.6bn in 2Q. Headcount increased 0.7% qoq to 598,056. TCS announced an interim dividend of Rs12/share. What we like: Broad-based growth in international markets, cash conversion (75.6% OCF/EBITDA), and steady deal intake. What we do not like: Weakness in Consumer Business and Regional Markets
Growth led by Tech & Services, Manufacturing, BFSI, and UK
Growth was led by Tech & Services (3.1% CC qoq), Manufacturing (3.1%), BFSI (2.5%), Life Sciences and Healthcare (0.3%), and CME (0.1%), offset by declines in Consumer Business (-0.7%), ER&U (-0.5%), and Regional Markets (-5.8%). Among geographies, growth was led by the UK (3.5% CC), Latam (4.3%), APAC (2.0%), North America (0.4%), and Continental Europe (0.4%), while India declined 10.3%.
AI-led delivery continues to scale
1) AI demand is shifting from isolated use cases to scaled programs across three patterns:
i) AI-native solutions with business outcomes
ii) AI-led enterprise system transformation
iii) autonomous global business services.
2) AI revenue is growing across every vertical, with BFSI, Manufacturing, and HLS leading.
3) AI is reshaping ERP transformations through process mining and human+AI process redesign.
4) AI governance, agent control planes, and AI token-cost management are emerging as significant new opportunities as enterprises scale agent deployments.
5) TCS helps clients manage AI token costs through benchmarking, model and architecture selection, and token economics advisory, aiming to deliver right level of intelligence at right cost.
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