TCS faces subdued growth and margin pressure despite rising AI revenue

Investment View and Valuation

Nirmal Bang Institutional Equities’ October 09, 2026, 2QFY27 result update on Tata Consultancy Services views the quarter as weak on underlying growth and order-book momentum, with margins continuing to face pressure. The broker reiterated its SELL rating and reduced its target price to Rs1,578, implying 24.0 per cent downside from the CMP of Rs2,076.

Nirmal Bang remains underweight on the information technology sector because it believes AI-led productivity gains and deflation could increasingly offset incremental AI spending, particularly affecting large-cap providers with substantial legacy-services exposure.

Q2FY27 Financial Performance

Tata Consultancy Services reported Q2FY27 revenue of US$7,642 million, up 0.2 per cent quarter on quarter and 2.4 per cent year on year in US dollar terms. Constant-currency revenue grew 0.5 per cent quarter on quarter and 2.8 per cent year on year.

Management said demand remained selective and uneven, with discretionary programmes lacking near-term value still under scrutiny.

Geographic and Vertical Performance

International revenue grew 1.2 per cent quarter on quarter in constant currency. The UK led geographic growth at 3.5 per cent, while North America and Continental Europe each grew 0.4 per cent.

On a year-on-year constant-currency basis, BFSI grew 3.9 per cent, manufacturing 4.2 per cent and technology and services 4.8 per cent. BFSI demand was supported by AI, risk and regulatory modernisation, cyber resilience and data platforms. Manufacturing benefited from factory automation, engineering productivity, supply-chain resilience, predictive maintenance and industrial AI.

Consumer business declined 1.0 per cent year on year. India revenue fell on project deferrals, which management described as a timing issue, while the BSNL contract may support regional-market revenue in the next few quarters.

Margin Performance and Outlook

Q2FY27 EBIT margin was flat quarter on quarter at 24.0 per cent, but was 35 basis points below consensus and 52 basis points below Nirmal Bang’s estimate. Higher subcontracting costs, a higher bench and investments in strategic partnerships, M&A, niche talent and growth areas offset operating leverage. Currency gains and operating leverage partly cushioned these pressures.

Management maintained its long-term EBIT-margin aspiration of 26 per cent to 28 per cent, although near-term priorities remain growth and investment. It identified subcontractor optimisation, utilisation, productivity and operating leverage as margin levers.

Management expects around 50 basis points of MHP-related margin dilution in the second half of FY27, depending on deal closure and integration timing, alongside furlough and ecosystem-investment headwinds.

Order Book and Demand Momentum

Order bookings remained a central concern. Total contract value was US$9.6 billion, up only 1.1 per cent quarter on quarter and down 4.0 per cent year on year, excluding the Porsche and Best Buy deals.

Management cited improving win rates and healthy quality of large transformation wins, but Nirmal Bang considers the improvement too modest to indicate meaningful demand acceleration. The Porsche engagement includes an AI centre of excellence for mobility, while the Best Buy GCC engagement supports the client’s transition to an AI-first organisation.

AI Services and Strategic Opportunities

A positive operating development was annualised AI services revenue of US$3.1 billion, up 19 per cent quarter on quarter and exceeding 10 per cent of total revenue. Management said AI revenue carries better pricing and higher margins than the company average.

Management sees demand evolving from experimentation towards AI-led technology modernisation, enterprise transformation and agentic AI. This includes spending on agentic control planes, governance, security, cost management and lifecycle management.

Management believes new AI opportunities, vendor consolidation and modernisation can partly offset productivity-led deflation.

Operational and Shareholder Metrics

• TCS ended Q2FY27 with 598,256 employees after a net addition of about 4,500 employees.
• LTM IT-services attrition declined 30 basis points quarter on quarter to 13.3 per cent.
• Cash conversion was 102.2 per cent of net income.
• DSO was stable at 74 days.
• The board recommended a Rs12-per-share dividend for Q2FY27.

Estimate Changes and Target Price

Nirmal Bang made limited estimate changes. It revised FY27E revenue to Rs2,89,900 crore, up 0.74 per cent, but cut FY27E EBIT by 0.83 per cent to Rs69,900 crore and lowered FY27E EBIT margin by 40 basis points to 24.1 per cent. FY28E EBIT margin was reduced by 10 basis points to 23.5 per cent.

The adjusted EPS forecasts are below consensus estimates. The Rs1,578 target price is based on an unchanged 11 times blended EPS of Rs143.5.