TCS' tightrope walk: Balancing data centre dreams and brewing lawsuits

Last week, it secured a $1 billion investment from private equity firm TPG Terabyte Bidco Pte Ltd for scaling its data centre platform HyperVault. But on the other hand, legal troubles are brewing.

A long-standing legal dispute with US-based CSC (now part of DXC Technology) over an insurance platform’s trade secrets, landed against TCS earlier this week. A US appeals court upheld the 2024 judgement by a US district court, levelling $194.2 million in damages on TCS.

Calling it an adverse ruling, TCS, in an exchange filing, said it is evaluating various options, including review and appeal before appropriate courts, and intends to vigorously defend its position. The levelled damages stand at less than ₹2,000 crore, against ₹12,075 crore consolidated profit clocked by the company in the September quarter (Q2FY26).

A fresh lawsuit has also landed on its plate. This time, it’s over the use and sale of technology allegedly patented by Albuquerque-based Calibrate Networks. While the monetary impact of the lawsuits is likely to be limited, the reputational damage can be significant, considering that North America is a key market for TCS, contributing 48% to its revenues.

As far as its data centre entry is concerned, TCS is among the front-runners as India plans to expand its data centre capacity from 1.2GW to 10GW by 2030. Similar plans amounting to over $30 billion have been announced by Google, Microsoft, and Amazon. Competition is rife, and given limited direct synergies with TCS’s core services, its right-to-win is being scrutinized with a fine-toothed comb.

TCS plans to add 100-200 MW in the next 18-24 months with about $1 billion investment. This is significant, considering India’s current capacity of 1.2 GW.

The company also promises differentiation through liquid-cooling to support high rack densities. Data centre racks that house powerful IT equipment within a smaller physical space need more power and cooling than standard racks.

TCS is also going for a technological partnership rather than just colocation services.

The latest deal with TPG was the first step towards putting its plans into action. But further details on capital structure, capital expenditure timelines, and client agreements are awaited. Note that initial revenues from its data centre foray are not expected until FY28.

TCS’s data centre plans are aimed at strengthening partnerships with native AI players, rather than directly catching up on AI innovation. That said, the acquisition of ListEngage should help enhance TCS’s agentic AI capabilities. The management also highlighted AI-led efficiency gains of 10-15% in Q2FY26, at par with the industry.

AI puzzle

Amid the mellowed IT spending, and with competition from GCCs and the ever-growing AI threat making matters worse, TCS’ plan to capture a piece of the AI infrastructure puzzle, seems promising on paper. But it is innovation in AI modelling where the real action is happening, and progress there would be appreciated more by the Street.

Meanwhile, in this calendar year so far, the TCS stock has declined 23%, sharper than Nifty IT’s 13% decline. The stock is trading at a FY27 price-to-earnings multiple of around 21x, showed Bloomberg data.

Note that in Q2FY26, TCS delivered sequential constant currency revenue growth of 0.8%, ahead of the consensus estimate of 0.4%. Furloughs, wage hikes, redundancy-related costs, and a ramp-up of the BSNL deal could cap margin gains in a seasonally weak Q3FY26. Also, there are lingering concerns about margin outlook despite management’s reaffirmation that its data centre plans won’t dilute consolidated margins.