Hold Tata Consultancy Services Ltd For Target Rs. 2,254 by InCred Equities
Growth bet, but near-term margin pressure
2QFY27 results summary
Tata Consultancy Services or TCS’ revenue of US$7,642m grew by 0.5% qoq/2.8% yoy in constant currency (CC) terms. International markets grew by 1.2% qoq in CC terms, while regional markets remained weak amid project deferrals. Annualised Artificial Intelligence (AI) revenue reached US$3.1bn, just over 10% of total revenue, with incremental AI revenue of US$125m in 2QFY27 versus US$75m in 1QFY27. The demand environment has not changed materially, though the medium-term outlook remains positive on the back of a healthy pipeline and positive client conversations. AI-led deals, ecosystem partnerships, acquisitions and new businesses such as data centres are the expected growth drivers. We expect near-term margin pressure as these investments continue. Our earnings estimate edge up marginally on Indian rupee depreciation.
Muted order book growth
2QFY27 order bookings at US$9.6bn grew by 1.1% qoq but declined 4% yoy, while LTM TCV stood at US$40.4bn, down 3.3% yoy. The order book excludes recent deal wins from Porsche and Best Buy. The pipeline remains strong, with positive client conversations and expectations of an improvement in client spending.
Higher investment weighs on EBIT margin
The EBIT margin at 24% (flat qoq, but down 119bp) was impacted by lower gross margin due to higher sub-contractor expenses and continued investment in partnership, M&A, capability building and talent acquisition. Seasonal furlough, acquisition integration and further investment could pose additional headwinds in 2HFY27F. Margin pressure is likely to persist in the near- to medium-term as investments continue, with management now guiding for a long-term margin aspiration of 26-28%.
Downgrade our rating to HOLD with a lower target price of Rs2,254
We now expect FY26-29F US$ revenue CAGR of 3.2% and PAT (Rs) CAGR of 8.7%, after factoring in MHP acquisition and Porsche deal. We value TCS at a P/E of 13.5x on FY28F EPS to arrive at our new target price of Rs2,254 (Rs3,052 earlier) and downgrade our rating on it to HOLD (ADD earlier). Better operating cash flow, dividend payout ratio certainty, and healthy return ratios are key upside risks, while key downside risks include a slower recovery in North America geography and consumer vertical, and slower revenue conversion.
Key conference-call takeaways
• Guidance: Medium-term growth outlook remains positive, with a long-term EBIT margin aspiration of 26-28%.
• Demand environment: Demand remains broadly unchanged but selective and uneven, with near-term discretionary spending under scrutiny, particularly where it does not deliver near-term value.
• Vertical-wise commentary:
* BFSI: Growth remains broad-based across banking, capital markets, and insurance verticals, with strong momentum in the UK, Europe, and APAC. Spending remains focused on AI, risk and regulatory modernisation, cyber resilience, data platforms, and operational efficiency.
* Consumer: Retail and consumer products remain sensitive to inflation, energy costs, and selective consumer spending. Demand remains resilient, but cost pressure and higher sourcing costs are affecting discretionary spending. Opportunities remain in operational efficiency, supply chain visibility, customer experience, pricing, cloud, data, and AIled modernisation.
* Life sciences and healthcare: Demand remains stable, supported by longterm priorities around compliance, clinical and research platforms, data modernisation, AI-enabled drug discovery, patient engagement, revenue cycle modernisation, and cybersecurity.
* Manufacturing: Demand is improving around factory automation, engineering productivity, product lifecycle modernisation, supply chain resilience, predictive maintenance, and industrial AI. Investments in AI-led vehicle engineering, smart manufacturing, and physical AI are supporting participation in larger and more strategic programmes.
* Technology & services: Growth is being driven by enterprise software, technology products, engineering, cloud modernisation, and digital transformation. Traditional application and infrastructure portfolios are also seeing increased adoption of agentic AI, with demand focused on AI-first software engineering, autonomous operations, platform simplification, and AI-ready data foundations.
* CMI: Growth in media, publishing, and digital platforms is offsetting continued pressure in the telecom vertical.
* Energy & Utilities: Spending remains focused on grid modernisation, resilience, cybersecurity, asset optimisation, and AI-enabled operations
• Workforce:
* Sub-contractor usage increased to meet near-term delivery requirements.
* ~10,000 university graduates were onboarded in 1HFY27, while hiring momentum in niche technologies is expected to continue.
• Annualised revenue of US$3.1bn is growing across verticals and carries higher gross margin than the company average.
• Revenue contribution from data-centre projects is expected over the next 18- 24 months, following contract wins
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