Tata Consultancy Services (TCS IN) – Q2FY27 Result Update – Balancing growth at the cost of margins – BUY

TCS reported 0.5% QoQ CC rev. growth, largely in line with our est. of 0.4% and consensus est. of 0.6%, with international business growing 1.2% QoQ CC. Growth was broad-based, led by BFSI (+2.5% QoQ CC), Manufacturing (+3.1%) and Technology & Services (+3.1%), although the demand environment remained unchanged, with discretionary programs still under scrutiny and see delayed ramp ups. Consumer and ERU segments continued to decline in Q2, but management expects Consumer to recover in Q3, supported by seasonality, while recovery in ERU is expected to be gradual. TCV remained steady at USD 9.6bn, excluding the Porsche and Best Buy deals, while annualized AI revenue crossed USD 3.1bn (~10% of rev.), highlighting strong traction in AI-led services. Despite improving AI traction and a healthy deal pipeline, we expect modest improvement in H2FY27 organic growth, given furloughs and continued weakness in traditional services. However, with MHP expected to start contributing from Q4FY27E, we raise our FY27E/FY28E rev. growth est. to 3.4%/5.0% from 2.9%/3.6% earlier. On margins, EBIT margin at 24.0% was 40bps below our est. of 24.4%, as investments in AI capabilities, strategic partnerships, M&A, higher bench and subcon exp. weighed on profitability in Q2. Management also indicated ~50bps potential margin dilution from MHP integration. We therefore lower our FY27E/FY28E EBIT margin estimates to 24.0%/24.2% from 24.6%/24.8% earlier, factoring in the Q2 margin miss and MHP related dilution. We bake organic USD revenue/INR PAT CAGR of 3.0%/6.6% over FY27-FY29E. We value the stock at 14x (earlier 15x) Sept. 28E EPS, to arrive at a TP of INR2,390 (earlier INR2,580). Maintain BUY.