Buy Tata Consultancy Services Ltd For Target Rs.3,800 by Prabhudas Liladhar Capital Ltd
Scaling AI to Drive the Next Phase of Growth Quick Pointers:
* Laid out strategy to drive AI led services and become full stack AI partner for clients
* Aspire for EBIT margin band of 26-28% while investing for growth
We attended TCS analyst day, the company demonstrated progress in AI-led services, its approach to make the talent AI-ready, and redefining partner ecosystem to provide measured value to enterprise clients. The company generates ~0.5% (annualized USD 1.5b) of its revenues through AI services, which is growing at a faster pace (around mid-teens QoQ) than the traditional IT Services. Currently, BPM as a function and BFS as a vertical are undergoing major chunks of pilots and experimentations, while other verticals have also joined the bandwagon of late. The AI maturity into business processes and functions would be slower starting with AI assisting humans (L2) to limited human intervention (L4), before it reaches the full autonomy (L5) with selflearning AI agents. TCS is also redefining partnerships beyond Hyperscalers & Enterprise solution providers to engaging proactively with deep-tech and AI native players ecosystem.
The management re-iterated its aspirations to achieve ~26-28% margin band from ~25% currently, despite having invested into a wide pool of AI opportunity that are time-tested. Additionally, to drive the AI efforts internally and make the existing employee pool AI-ready, it is investing ~USD1bn in training infra and re-skilling. We believe the strategic move to fill the white gaps through partnerships and acquisitions is much needed to stay competitive. With this service-led investment roadmap it is stitching end-to-end offerings with infraled investments (USD 6-7b) put out earlier. We retain BUY with TP of Rs. 3,800
Pivot from Digital to AI enterprise: TCS is pivoting from a digital transformation partner to an AI-led technology enterprise partner, positioning AI as the core operating layer for clients through a five-point strategy spanning internal AI transformation, service redefinition, future-ready talent, industry-led solutions, and ecosystem partnerships. Strong demand reflected in AI services revenue of ~USD 1.5 bn (annualized) and ~5k AI engagements executed across industries, with broad-based adoption evidenced by 54 of the top 60, USD 100 mn+ clients actively running AI programs, underpinning this strategic transition. Growth opportunities span BFSI, manufacturing, consumer, technology, and services, while AI is also catalyzing adjacent spend across cloud, data, ERP, cybersecurity, and legacy modernization as clients scale pilots into enterprise-wide AI deployments.
Investing for One Stop Enabler for AI: TCS’s strategy aspires to position itself as a one-stop AI orchestrator, combining internal IP, industry solutions, and deep ecosystem partnerships with hyperscalers and AI-native firms. To support this, TCS is making significant investments in AI infrastructure, including planned ~1 GW data center capacity, enabling full-stack AI services. In parallel, the company continues to invest heavily in employee learning and development, with largescale AI skilling programs and broad access to AI tools across its workforce to drive internal adoption and delivery readiness. This integrated approach will allow TCS to capture a larger share of client technology budgets while supporting scalable, enterprise-wide AI adoption over the long term.
Sustaining Margins while investing for growth: TCS reiterated its operating margin aspiration of 26–28%, even as it steps up investments in AI infra, platforms, and talent. Management indicated that incremental investments will be largely funded through AI-led productivity gains, improved utilization, pyramid optimization, and tighter SG&A control. The increasing mix of outcome-based pricing and higher-margin AI and new-age services is also expected to structurally support margins.
Other KTA’s
* TCS indicated that new-age services revenue has grown to ~USD 11 bn and that the company is proactively redesigning clients’ legacy spend toward new-age and AI-infused services, which is expected to cannibalize a portion of existing revenue. However, management expressed confidence that the faster-growing AI and new-age technology services revenue will more than offset this revenue loss over time.
* TCS is positioning itself as a full-stack AI partner, covering the entire value chain from infrastructure and migration to models, use cases, and AI agents which will enhance client ROI and stickiness.
* TCS is creating an AI autonomy maturity model inspired by ADAS in vehicles, defining a structured progression from AI-assisted tools to fully agentic enterprises. Using this framework, TCS will assess clients’ current infrastructure and autonomy readiness, and systematically guide upgrades toward higher autonomy levels to drive productivity and scalable AI adoption.
* TCS underscored its strong organizational readiness for AI, underpinned by significant investments in AI infrastructure that give employees broad access to hyperscalers, platforms, and advanced AI tools. The company has developed a deep AI talent base, with 180k+ employees trained in higherorder AI skills, while over 50% of new hires are equipped with new-age and AInative capabilities.
* TCS is helping clients operationalize AI by building industry-specific, crossfunctional solutions and enabling scalable deployment beyond pilots. Management highlighted significant incremental opportunities across cloud, ERP, data, and cybersecurity, which remain critical for AI readiness. TCS is driving end-to-end value-chain impact through innovate–build–scale frameworks, including the development of 100+ AI agents in manufacturing (35 already deployed), while AI-led approaches are also accelerating legacy modernization.
* TCS highlighted a dual strategy of deepening AI ecosystem partnerships across hyperscalers, platforms, domain leaders, and AI-native firms, while pursuing selective M&A to strengthen capabilities in cloud, cybersecurity, digital, enterprise platforms, and advisory. This approach accelerates scaling of new-age offerings, enhances cross-sell, and reinforces TCS’s positioning as a full-stack AI transformation partner.
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