Mumbai – Tata Consultancy Services (TCS) is poised for a stronger September quarter, according to insights from JM Financial following its recent meeting with the IT giant's management. The brokerage reports continued decent demand despite persistent macroeconomic uncertainties, with client conversations indicating a positive trajectory for the coming period.
Demand Driven by Modernization and Productivity
JM Financial noted an increasing trend in sizeable legacy modernization deals for TCS, typically valued between $5 million and $10 million across various industry verticals. Importantly, management indicated no pricing pressure on these newer modernization engagements, though competitive intensity remains high in renewals and ongoing negotiations.
The management also projects that the fiscal year 2027 will surpass FY26, attributing client spending to a focus on productivity enhancements, modernization initiatives, and vendor consolidation. An improved macroeconomic environment is expected to further translate client discussions into actual spending. TCS anticipates a return to high-single-digit revenue growth in the medium term once productivity-led deflation is fully absorbed.
While the BFSI (Banking, Financial Services, and Insurance) and Technology verticals remain robust, Consumer Products and Life Sciences & Healthcare are expected to remain soft in the near term. The Manufacturing sector, however, is set to benefit significantly from the ramp-up of the substantial $800 million SKF deal, which spans five years.
AI Services Revenue Surpasses $2.6 Billion
A key highlight from the meeting was the impressive performance of TCS's AI services. The company’s annualised AI services revenue crossed $2.6 billion in the first quarter of FY27 and continues its growth trajectory. These newer AI-driven modernization deals are characterized by shorter tenures and the absence of pricing pressure, reflecting the high value placed on these advanced solutions.
TCS continues to strategically invest in partnerships and innovative solutions, maintaining a keen focus on profitability amidst a highly competitive landscape for renewals and negotiations.
Margin Improvement and Buyback Options
Management expects a sequential improvement in its EBIT (Earnings Before Interest and Taxes) margin throughout the remainder of FY27, largely due to wage hikes now being behind them. TCS is targeting an exit EBIT margin of 25 percent or more for FY27. However, the ramp-up of the BSNL project and the integration of MHP could potentially influence this trajectory.
JM Financial also observed that TCS plans to enhance margins through operational efficiencies over the next three quarters. Currency fluctuations, however, are not expected to provide a significant incremental benefit in Q2FY27.
Regarding shareholder returns, TCS remains eligible for a buyback, with the board regularly considering both dividend and buyback options. JM Financial noted that the stock was trading at approximately 14.4 times its one-year forward consensus earnings per share.
For the BSNL project, the final purchase order is still pending. While some revenue contribution is expected in Q2, a full ramp-up could take six to nine months. Management indicated that this new opportunity is likely to be smaller than the previous BSNL engagement.