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Q1FY26 Revenue & EBIT miss on weak macros; PAT beats on other income

* Revenue for Q1FY26 came at INR 634.3Bn down 1.6% QoQ (vs Consensus est. at INR 646.5Bn).

* EBIT for Q1FY26 came at INR 155.1Bn, down 0.6% QoQ (vs Consensus est. at INR 156.9Bn). EBIT margin was up 26bps QoQ to 24.5% (vs Consensus est. at 24.2%).

* PAT for Q1FY26 came at INR 127.6Bn, up 4.4% QoQ (vs Consensus est. at INR 122.5Bn) owing to 62% QoQ spike in other income which was on account of higher interest income earned on tax refund.

Top-line disappoints; AI-driven pipeline assures comfort: In Q1FY26, TCS reported a 3.3% QoQ revenue de-growth in CC terms, due to 0.5% dip in International revenue & 2.8% impact from BSNL deal ramp-down. Despite macro challenges—conflicts, economic uncertainty, & project delays, TCS signed deals worth USD 9.4Bn, down 23% QoQ but within expected USD 8–10Bn range. North America contributed USD 4.4Bn, BFSI USD 2.5Bn, & the Consumer Business Group USD 1.6Bn to this TCV. Despite demand contraction in Q1FY26 which impacted utilization, management remains optimistic about FY26 to outperform FY25 in International revenues (as Domestic revenues will be down due to large BSNL deal ramp down seen in Q1FY26), driven by macro stability in H2. However, we expect TCV-to-revenue conversion risks persist amid client spending delays with caution being maintained even by BFSI clients (mainly in Europe as N. America & UK BFSI spends are stable). Consumer, Pharma industries are facing delays with respect to supply chain & higher R&D costs; Manufacturing is investing in tech debt reduction while Energy & Utilities are scaling back on policy tensions. In Healthcare, payers are trying to optimise costs. Med-tech industry undergoing demand pressure & regulatory scrutiny.

Excess capacity dilutes EBITM gains from BSNL ramp-down: EBIT margin for Q1FY26 improved by 30 bps sequentially to 24.5%, but fell short of expectations. Cost savings from the BSNL deal were offset by long-term investments in capacity and talent, leading to excess capacity amid a demand slowdown. For Q2FY26, TCS plans to enhance margins by focusing on utilization, productivity, & optimizing its pyramid structure. These initiatives are expected to improve operational efficiency & support sustained margin growth. Workforce increased by over 5,000 in Q1, while the LTM attrition rate rose by 50 bps sequentially to 13.8%. The company has yet to finalize decisions regarding wage hikes.

View & Valuation: TCS remains optimistic about international revenue growth. While short-term macro concerns may impact H1FY26, its strong project pipeline, existing capacity, and continued investments in technology position it well for future success. As macro conditions stabilize, TCS is expected to deliver strong long-term performance driven by sustained demand and strategic preparedness as it continues to stay ahead in technology led revolution. We expect macro demand environment to improve gradually & anticipate Q2FY26 to be better than Q1FY26. Thus, we have introduced FY28E and expect Revenue/ EBIT/ PAT to grow at a CAGR of 6.5%/ 9.6%/ 9.4%, respectively, over FY25-FY28E and maintain our ‘BUY’ rating and target price of INR3,950, which implies a PE multiple of 24x (maintained) based on the average of FY27E & FY28E EPS of INR164.6.

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