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Focus to turn to international markets in FY26

Tata Consultancy Services’ (TCS IN) Q3 show was weak on revenue, while margins were in line with ours and street expectations. Deal wins came in above the guided range, which should provide some visibility to growth in the near term. Also, led by conversations with clients, TCS sounded confident on strong recovery in the international markets in CY25/FY26 (possibility of high single-digit growth). This suggests that discretionary spend may improve. This should recoup any revenue drop emanating from BSNL’s 4G deal in FY26. Also, margin improvement levers are intact in terms of pyramid correction (TCS is en-route to hire 40K freshers in FY25 and more in FY26) and utilization improvement, but a revival in growth may lead to some uptick in attrition, which may strain cost. So, we trim FY26E/27E margin – Maintain Accumulate.

Furlough and discretionary weakness hit Q3 revenue:

TCS reported a revenue growth of 0% (flat QoQ in CC) due to continued weakness in discretionary spend in Q3 as also regular furlough impact in Q3. Per TCS, one of its large clients (USD 100mn+ bracket) witnessed division in its business, which also hit revenue growth in Q3. USD revenue declined 1.7% QoQ but rose 3.5% YoY due to cross-currency headwinds. In INR terms, the drop was limited due to INR depreciation against USD growth as revenues in INR were down only 0.4% QoQ.

Geography-wise and in USD YoY, North America and continental Europe reported a drop of 2.4% and 4%, respectively. Growth in the UK market also came down to 4.8% YoY compared with close to double-digits in the earlier quarters. India market grew 66% YoY and its revenue contribution is now ~10%.

Vertical-wise and in USD YoY, BFSI, Life Sciences and Communications continue to report a decline, even as Consumer Business and Manufacturing reported some growth. TCS recorded a TCV of USD 10.2bn in Q3 and USD 27.1bn in 9MFY25. TCV for BFSI, Retail and North America was USD 3.2bn, USD 1.3bn and USD 5.9bn, respectively.

EBIT margin improved due to cost optimization: EBIT margin rose 40bps QoQ to 24.5%. Despite weak revenue performance, TCS was able to improve margin on account of cost optimization measures such as pyramid correction (it continues to hire freshers beyond the targeted 40K fresher hiring in FY25) and continued improvement in utilization. Note that margins were helped by flat sub con cost (at 4.4% of sales) in Q3.

We recommend Accumulate with TP pared to INR 4,530 (from INR 4,680 earlier): Overall, Q3 was better on margin. We cut FY25E USD revenue estimates to 3.9% (from 5%) to factor in weak 9M USD performance. We build in recovery FY26 onwards and factor in 7% and 8% USD growth in FY26E/27E. We cut FY26/FY27E EBIT margin estimate by 20/70bps, as we now build in lower-than-guided margins, as demand recovery may lead to some uptick in attrition and TCS may have to incur incremental costs without compromising on capturing demand. We recommend Accumulate with TP pared to INR 4,530 (INR 4,680 earlier)

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