TCS’s AI pivot, strategy shift and marginal Q2 beat—nothing excites investors
Bold AI bets and an earnings beat has failed to lift investor sentiment as TCS charts a new strategic course.
Amid global macroeconomic uncertainty and muted discretionary IT spending, Tata Consultancy Services Ltd (TCS) has pulled a rabbit out of its hat. India’s largest software exporter is pivoting decisively towards artificial intelligence (AI), aiming to become the world’s biggest AI-led technology services company.
TCS plans to establish multiple AI and sovereign data centres across India through a wholly owned subsidiary to provide infrastructure and technology-enabled services. The facilities will have a combined capacity of 1GW, which the company expects to achieve over five to seven years by adding about 150MW annually. For this, TCS will invest a total of around $6.5 billion, which will be funded through a mix of debt and equity.
With the AI theme rapidly gaining traction, the move appears well-timed as TCS seeks to tap emerging opportunities across the tech ecosystem. Given its robust balance sheet, the capital outlay looks manageable. However, execution will be critical, especially as the investment could weigh on near-term earnings growth amid soft discretionary demand.
Notably, TCS will only provide passive infrastructure for AI data centres, it won’t run cloud workloads or offer managed cloud services. That means limited overlap with its core IT services portfolio and, consequently, few direct synergies.
Moreover, the AI data centre business, while high-growth, is also capital-intensive and offers lower returns on capital employed (RoCE). “Our back of the envelope calculation suggests that project IRR is 10–12% and equity IRR is 12–14%. Thus, TCS’ stabilised return on equity, after five years, shall decrease to around 40% versus 50% as of FY26E," said an ICICI Securities report dated 10 October.
In a parallel move, TCS has acquired 100% of ListEngage, a Salesforce Summit partner and marketing technology specialist, for up to $72.8 million in cash. The deal, the company's first acquisition in nearly a decade, signals a renewed focus on inorganic growth.
Q2 performance
Operationally, TCS posted sequential constant-currency (CC) revenue growth of 0.8% in the September quarter (Q2FY26), surpassing the consensus estimate of 0.4%. All verticals except consumer, and all geographies except the UK, returned to sequential growth. Operating margin expanded 70 basis points to 25.2%, again beating consensus expectation, driven by rupee depreciation, employee pyramid rebalancing, and operational efficiency, though wage hikes from September offset part of the gains.
The company maintained its aspirational Ebit margin range of 26-28%. Its H-1B visa exposure remains minimal, with only around 500 associates opting for it.
The total contract value of deals rose 16% year-on-year to $10 billion. This included a mega deal win with TRYG insurance. Based on Q2 performance and strong demand pipeline, TCS expects stronger international revenue growth in FY26 compared with last year.
However, according to Motilal Oswal Financial Services, this guidance seems fuzzy. “The international business declined ~1% in CC (+0.7% in USD by our estimates) in H1FY26. Even assuming a 1% CQGR in H2, we estimate FY26 international growth at ~2.5% in USD terms. This implies only ~0.5-0.8% CC growth, indicating no material improvement over FY25," said a Motilal Oswal report dated 9 October.
TCS shares slipped around 1% on Friday, suggesting investors are awaiting more convincing evidence of a sustained growth revival. The stock has fallen 28% from its peak, compared with a 15% decline in the Nifty IT index.
At FY27 price-to-earnings estimates, TCS trades at about a multiple of 20x, according to Bloomberg data. Valuations could come under further pressure if earnings recovery remains elusive. The company management expects furlough levels in the seasonally weak December quarter to remain similar to last year.
topics
