TCS AI revenue gains momentum while margin investments temper earnings outlook

Investment View and Recommendation

Prabhudas Lilladher's October 9, 2026 Q2 FY27 result update on Tata Consultancy Services maintains a BUY recommendation, although the target price has been reduced to Rs 2,390 from Rs 2,580. The broker views TCS as balancing growth with margin pressure.

Improving AI-led services traction and a healthy deal pipeline support the outlook. However, furloughs, continued weakness in traditional services and pressure on discretionary spending are expected to constrain the pace of organic growth.

Q2 FY27 Revenue Performance

TCS reported Q2 FY27 constant-currency revenue growth of 0.5 per cent quarter on quarter, broadly in line with Prabhudas Lilladher's 0.4 per cent estimate and below the 0.6 per cent consensus estimate. International business grew 1.2 per cent quarter on quarter in constant currency.

Reported revenue was Rs 732 billion, up 11.2 per cent year on year and marginally above the broker's Rs 731 billion estimate. Growth was led by BFSI, Manufacturing and Technology and Services.

AI Traction and Deal Pipeline

Annualised AI revenue rose 19.2 per cent quarter on quarter to US$ 3.1 billion from US$ 2.6 billion in Q1 FY27, representing about 10 per cent of revenue.

Q2 deal wins, measured by total contract value, were US$ 9.6 billion. This figure excluded the five-year strategic partnership with Porsche AG and the Best Buy deal to transform its India global capability centre.

Management expects Consumer Business to recover in Q3 FY27 on seasonality, whereas a recovery in Energy, Resources and Utilities is expected to be gradual.

Profitability Performance

Profitability was weaker than expected. EBIT margin was flat quarter on quarter at 24.0 per cent, 40 basis points below the broker's estimate and 20 basis points below consensus.

Continued investment in AI capabilities, strategic partnerships, M&A-related initiatives and hiring niche talent, along with a higher bench and subcontracting expenses, affected margins. These pressures were partly offset by currency and operating leverage. Management also indicated potential margin dilution of about 50 basis points from MHP integration.

Earnings Estimates and Valuation

Prabhudas Lilladher has raised its FY27E and FY28E revenue growth estimates to 3.4 per cent and 5.0 per cent from 2.9 per cent and 3.6 per cent, respectively, as MHP is expected to begin contributing from Q4 FY27E.

However, the broker has cut its FY27E and FY28E EBIT margin estimates to 24.0 per cent and 24.2 per cent from 24.6 per cent and 24.8 per cent, reflecting the Q2 margin miss and MHP-related dilution.

The broker forecasts an organic US-dollar revenue CAGR of 3.0 per cent and a rupee PAT CAGR of 6.6 per cent over FY27 to FY29E. Its Rs 2,390 target price is based on 14 times September 2028E EPS, reduced from 15 times previously.

Key Risks

• Persistent weakness in traditional services.
• Delayed discretionary programme ramp-ups.
• Furloughs.
• Sustained investment-led margin pressure.