Tata Consultancy Services (TCS) stock rose 2% in Friday’s early trade following its June quarter (Q1FY27) results that were announced post market-hours on Thursday.
Going into Q1 earnings season (usually a strong quarter for the sector), expectations for tier-1 IT firms were downbeat amid client caution and an evolving artificial intelligence (AI) landscape.
TCS shares slid to a 52-week low of ₹1,976.80 on 1 July. Q1FY27 earnings of TCS had some positives. Sequential constant currency (CC) revenue grew 0.4%, marginally ahead of the Street’s 0.2% estimate.
Segment-wise, CC growth was led by technology, and BFSI, while consumer, life science and manufacturing were a drag. Geographically, North America, continental Europe and MEA declined, but the UK, Asia Pacific and India fared better.
Total contract value (TCV) of deals slid 20.8% sequentially to $9.5 billion; year-on-year growth was flat and below average deal TCV run-rate of $10 billion. This includes one net new five-year mega deal win (AI-led transformation deal) of $800 million with SKF and two net new multi-million deals with ServiceNow and a Europe-based Fortune Global 50 company.
The deal mix reflects a marginal shift toward transformative net new deals versus renewals, the management said. The pace of mega deal wins has moderated for TCS from three in the prior quarter, though six mega deals have been signed over the last five quarters.
Further, AI projects have begun moving from proofs of concept to large-scale projects. Annualised AI revenue rose to $2.6 billion (8.5% of revenue) in Q1FY27 from $2.3 billion in Q4FY26. AI services revenue for Q1FY27 stood at around $650 million.
The management highlighted no major AI-led revenue cannibalization yet, citing productivity gains of 10-15%. “Although the revenue from AI is growing at double-digit (sequentially), we believe the leakages in the traditional bucket are weighing on topline growth,” said PL Capital. The brokerage has retained its growth rate (CC YoY) estimates at 3.5% and 4.5% for FY27E/FY28E despite the mega deal awarded in Q1.
Earnings before interest and tax (Ebit) margin declined 130 basis points sequentially to 24% in Q1FY27, impacted by wage hike, along with continued investments in AI partnerships, talent and sales.
The company added around 14,000 freshers in Q1, mainly focussed on AI-native skills. TCS reported its highest net headcount addition in 15 quarters with 9,279 net additions. Ebit margin would remain under pressure due to continued investments in sales, AI capabilities and partnerships. With a balanced approach, TCS aspires to exit FY27 with margin at around 25%.
From its 52-week high of ₹3,425 seen on 9 July last year, the stock is down 40%, as meaningful growth triggers remain elusive. It is trading at FY27 price-to-earnings multiple of 13, showed Bloomberg data. Valuation is undemanding; however, a re-rating would require a visible acceleration in revenue growth, said Emkay Global Financial Services.