Buy TCS Ltd for the Target Rs. 4,400 by Motilal Oswal Financial Services Ltd
A safe quarter
Just beats estimates, whereas demand signals remain choppy
* TCS reported revenue of USD7.5b in 3QFY26, rising 0.8% QoQ in CC terms, above our estimate of 0.5%. Growth was led by regional market and others (up 4.6% QoQ CC). Consumer business/Energy, resources, and utilities/Life sciences and healthcare grew 1.3%/1.0%/0.9% QoQ CC. EBIT margin was 25.2% (flat QoQ), above our estimate of 24.9%. Adj PAT rose 6.4% QoQ/13.4% YoY stood at INR141b (above our est. of INR131b). This excludes one-off restructuring and the statutory impact of new labor laws expenses of INR34b.
* For 9MFY26, revenue/EBIT/Adj. PAT grew 2.9%/5.2%/10.1% in INR terms compared to 9MFY25. We expect revenue/EBIT/Adj. PAT to grow 6.8%/10.8%/10.9% YoY in 4QFY26. TCS reported a deal TCV of USD9.3b, down 8.8% YoY. The book-to-bill ratio was stable at 1.2x. We reiterate our BUY rating on TCS with a TP of INR4,400, implying a 36% potential upside.
Our view: Reasonable deal momentum supports visibility; demand inflection still awaited
* Revenue growth of 0.8% QoQ CC (0.3% QoQ in USD for international markets) was slightly ahead of estimates, driven by Consumer, Energy and Utilities, Life Sciences & Healthcare, and Communication, with Europe and emerging markets offsetting seasonally weak North America. While 4Q growth should improve as furlough impact fades, a clear demand upturn is still not visible, with growth coming from select pockets rather than broad discretionary recovery.
* Deal momentum was reasonable with USD9.3b TCV in 3Q, including a megadeal, supporting near-term visibility. That said, management continues to highlight deal-timing volatility, and we would look for an improved ACV mix and more short-cycle AI deals to signal a durable demand recovery.
* Operating margins beat expectations, holding flat at 25.2% QoQ despite wage hikes and higher SG&A. Gains were driven by productivity, pyramid mix, and better revenue per employee, with some help from currency. With wage headwinds largely absorbed and one-offs behind, we expect margin stability ahead, with upside dependent on execution rather than pricing.
Valuations and changes to our estimates
* We expect USD revenue/EPS to compound at ~3.6%/~7.6% over FY25–28, reflecting steady growth from select demand pockets and supported by reasonable deal visibility, albeit with continued volatility in deal closures. Margins have remained stable as wage headwinds and one-offs subside, with further upside dependent on execution rather than pricing. We keep our estimates largely unchanged and reiterate BUY with a TP of INR4,400, based on 26x FY28E EPS, implying ~36% upside.
Beat on revenues and margins; annualized AI service revenue up 18% QoQ
* USD revenue came in at USD7.5b, up 0.8% QoQ in CC terms, above our estimate of 0.5% growth.
* In terms of geographies, India was up 8.0% QoQ CC. Annualized AI services revenue stood at USD1.8b, up 17.3% QoQ CC.
* 3Q growth was led by regional market and others (up 4.6% QoQ CC). Consumer business/Energy, resources, and utilities/Life sciences and healthcare grew 1.3%/1.0%/0.9% QoQ CC.
* EBIT margin was 25.2% (flat QoQ), above our estimate of 24.9%.
* TCS reported a deal TCV of USD9.3b in 3QFY26, down 7%/8.8% QoQ/YoY.
* Adj PAT rose 6.4% QoQ/13.4% YoY stood at INR141b (above our est. of INR131b). This excludes one-off restructuring and the statutory impact of new labor laws expenses of INR34b.
* The net headcount further declined by 11,521 employees to 582,163 (down 1.8% QoQ) in 2QFY26. Attrition (LTM) increased by 20bp QoQ to 13.5%.
* The Board declared a third interim dividend of INR11/share and special dividend of INR46/share in 3QFY26.
Key highlights from the management commentary
* Based on client conversations and strong momentum in AI leadership, the company is confident about a good CY26.
* Management had highlighted an improving business environment in 2Q, which continues to be visible in 3Q. AI and Data continue to be key growth drivers across all verticals.
* Revenue grew 0.8% QoQ in CC terms, while international business grew 0.4% QoQ CC.
* The company continues to aspire for higher growth in international markets, compared to emerging markets in FY26.
* Annualized AI services revenue reached USD1.8b, up 17.3% QoQ CC. This includes AI programs across value chains and the data work required to deliver them, but excludes AI leveraged within delivery (e.g., testing and software engineering).
* AI deployments have shifted from POCs and pilots to ROI-led, scaled implementations, driving growth. ? The Board declared a third interim dividend of INR 11 per share and a special dividend of INR46 per share in 3QFY26.
Valuation and view
* We expect USD revenue/EPS to compound at ~3.6%/~7.6% over FY25–28, reflecting steady growth from select demand pockets and supported by reasonable deal visibility, albeit with continued volatility in deal closures. Margins have remained stable as wage headwinds and one-offs subside, with further upside dependent on execution rather than pricing. We keep our estimates largely unchanged and reiterate BUY with a TP of INR4,400, based on 26x FY28E EPS, implying ~36% upside.
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