Buy Tata Consultancy Services Ltd for Target Rs.3,950 by Choice Institutional Equities
View & Valuation: TCS’s AI growth is being driven by rapidly expanding AI services revenue, an AI-first delivery culture, rising large-client adoption, workforce transformation and strong ecosystem partnerships, including its HyperVault AI-led data-centre JV with TPG. The company is executing two core AI programs — AI-led business transformation and AI-enabled modernisation, supporting its shift toward an outcome-based, AI-driven business model with long-term competitive advantages. Thus, we expect Revenue, EBIT and PAT to expand at a CAGR of 7.2%, 9.6% and 8.9%, respectively, over FY25–FY28E and maintain our BUY rating with a target price of INR 3,950, implying a 24x multiple on the average of FY27E and FY28E EPS of INR 164.6
Q3FY26 Revenue in line with Estimate; One-off impacts Profitability QoQ
* Reported Revenue for Q3FY26 stood at USD 7.5 Bn up 0.6% QoQ (vs CIE est. at USD 7.5 Bn). In CC terms growth was 0.8% QoQ. In INR terms, revenue stood at INR 670.9 Bn, up 2.0% QoQ (vs CIE estimates. at INR 672.1 Bn).
* EBIT for Q3FY26 came in at INR 168.9 Bn, up 2.0% QoQ (vs CIE est. at INR 163.8 Bn). EBIT margin was flat QoQ at 25.2% (vs CIE estimates at 24.3%).
* PAT for the quarter came in at INR 106.6 Bn (vs CIE at INR 127.4 Bn), down 11.7% QoQ due to exceptional one-offs to the tune of INR 33.9Bn
Stable TCV Performance despite BFSI Seasonality
Q3FY26 TCV stood at USD 9.3 Bn, down 7% QoQ, but included a mega deal in the BFSI vertical, reflecting continued deal momentum. North America contributed USD 4.9 Bn, BFSI USD 3.8 Bn and Consumer Business at USD 1.8 Bn. Among verticals, Regional Markets & Others led growth with a 4.6% QoQ increase, followed by Consumer Business at 1.3% QoQ in CC terms, while BFSI declined 0.4% QoQ due to seasonal factors. The BFSI softness was largely seasonal rather than structural, with underlying account-level growth remaining healthy. Strong deal wins and continued expansion across most BFSI accounts provide confidence that the segment should return to growth in the coming quarters, extending the positive trend seen prior to this quarter.
AI-led Transformation gains Momentum
TCS is rapidly transitioning into an AI-led services company, with its AI business reaching an annualized USD 1.8 Bn run-rate, growing 17.3% QoQ in CC. The company has moved beyond pilots to scaled, ROI-driven AI deployments, supported by investments across the full AI stack, including its HyperVault datacentre JV with TPG and the acquisition of Coastal Cloud to strengthen AI and Salesforce capabilities. Together, these initiatives reflect TCS’s steady evolution toward an outcome-based, AI-driven business model.
Q3 EBITM Reflects Strong Operational Resilience Despite Wage Hikes
TCS reported a stable operating margin of 25.2%, with ~80 bps of QoQ operational efficiencies and currency benefits offset by a (50) bps impact from wage hikes and (50) bps from higher brand, partnership and SG&A spending. However, the company booked exceptional items totaling INR 33.9 Bn, comprising restructuring costs of INR 2.5 Bn, a one-time statutory charge of INR 21.3 Bn related to new labor codes, and a legal provision of INR 10.1 Bn, all of which are largely non-recurring. Management remains optimistic on aspirational margin band of 26% to 28% going ahead.
Management Call - Highlights
* Management highlighted their Unified Human AI Services autonomy models, which range from using AI as a tool to building agentic enterprises. AI is being used internally to transform hiring, onboarding, and personalized learning via a Learning Coach platform.
* TCS made a provision of INR 21.2 Bn related to new India labor codes (gratuity and leave liability). Ongoing impact from these labor code changes is expected to be minimal, approximately 10 to 15 basis point.
* TCS is seeing the cycle from innovation to implementation accelerate sharply, delivering three times more rapid builds (short-cycle, highROI projects) this quarter compared to previous periods.
* Regarding the USD 1 Bn partnership with TPG for gigawatt-scale AI data centers, management noted that revenue will not be immediate. The process involves securing an anchor customer first, followed by a build-out period of approximately 18 months before revenue begins to kick in.
* The company is driving two core AI programs: AI-led business transformation and AI-enabled modernization across enterprises.
* Geographically, North America saw flat growth, UK saw a decline of 1.9%, Continental Europe grew 2.1% and Asia Pacific at grew at 1.1%.
* TCS remains committed to returning substantial free cash flows to shareholders, recommending an interim dividend of INR 11 per share and a special dividend of INR 46 per share this quarter.
* Voluntary attrition stood at 13.4% as compared to 13.3% in the previous quarter, while the total headcount of the company stood at 582,163.
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