Shareholders and investors are not gung-ho on TCS’s biggest bet
TCS plans to invest over $6 billion over the next 5-7 years to establish a data centre business in India, focusing on AI providers and cloud service companies. Analysts express concerns over profitability and the venture's immediate revenue contributions.
“We are on a journey to become the world’s largest AI-led technology services company," said Tata Consultancy Services (TCS) Ltd’s chief executive K. Krithivasan in prepared remarks on Thursday after announcing that the company will spend over $6 billion in about six years to set up data centres.
Investors and analysts are uncertain about the country’s largest IT services firm's largest pivot since its public listing in 2004. The primary concern is the lack of details and the potential impact on profitability.
Shares of TCS were down more than 1% in afternoon trade.
“Regarding the data center announcement, we await clarity on the capital structure, capex schedule, and other details such as potential rentals and signed MOUs (memorandum of understanding). At present, we do not model data center investments or related revenue into our forecasts," said Motilal Oswal Financial Services analysts Abhishek Pathak, Keval Bhagat, and Tushar Dhonde, in a note dated 9 October.
A second brokerage said it was unclear on the returns this venture would generate.
“It is unclear to us how the RoEs of this business will be similar to the existing business RoE of ~50% given it is capex-heavy nature with IRRs at ~20%," said Nomura analysts Abhishek Bhandari and Karan Nain, in a note dated 10 October.
RoE or return on equity is a metric that determines a company's ability to generate profits from the money invested by shareholders. IRR, short for internal rate of return, measures an investment's rate of return.
Target: Hyperscalers, deeptech
On Thursday, during the company’s post-earnings call with analysts (after the management cancelled its scheduled press briefing), TCS said that it would build the data centre business through a new unit. It plans to invest $6-7 billion over the next 5-7 years to develop up to 1GW capacity.
All the data and computing will be hosted in India, and the company will look to sell its data service to pure play AI providers, deep technology companies, and hyperscalers or large scale cloud service providers.
Additionally, the data centre will be a colocation facility, where clients like hyperscalers, AI-native companies, Indian enterprises, and the government bring in their own compute and storage power.
Adding to the uncertainty was the management’s call to hire an external team to run this business.
“So, one, the business itself (we) will be keeping it separate. It (data centre) will have separate management bandwidth in the process of putting in an entirely separate team outside of TCS for this, but it will have adjacencies with TCS. It's a natural extension in terms of what partnerships which we are looking at creating with hyperscalers, what services we want to provide to our customers and as an adjacency," said Samir Seksaria, chief financial officer of TCS, during the analyst call.
This business would not contribute much to the company’s revenue immediately. Its management said that it would take another "18 to 24 months when the first revenue starts kicking in".
Profitability concern
However, another brokerage said profitability will take a hit.
“We think this direction could offer new potential revenue streams though could negatively impact margins," said BMO Capital Markets analysts Keith Bachman, Adam J. Holets, Bradley Clark, and Jonathan Stein, in a note dated 9 October.
The BMO analysts added that they “do not envision near-term top-line improvement from related AI services at this juncture".
TCS ended the July-September 2025 period with $7.47 billion in revenue, up 0.6% sequentially. It reported 25.2% in operating margins, up 70 basis points from the preceding quarter. One basis point is a hundredth of a percentage point.
Data centres are areas where large servers are stacked on top of each other. These stacks of servers store computer applications and vast amounts of data for companies.
According to a Kotak Mutual Fund note published on 20 September, there are four factors driving demand for data centres in India: increasing mobile users, especially on 5G networks, increased cloud adoption, regulatory needs to store data within a geographical boundary, and higher data usage for new applications in general.
Mumbai and Chennai have the highest data centre capacity “largely due to sea landing cables and availability of uninterrupted power," according to the Kotak Mutual Fund report. Both cities comprise nearly 65% of the country's total data centre capacity. Mumbai and Chennai have 536MW and 113MW of data centre capacity, respectively.
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