What Should You Do with TCS? PL Capital Sees Upside as Margins Expand and AI Bets Deepen
- 10th October 2025
- 04:00 PM
- 5 min read
Summary
Shares of TCS slipped nearly 2% today, even as the IT major opened the Q2 earnings season with stable margins and a stronger deal pipeline. The broader IT sector remains under pressure, but PL Capital expects TCS’s expanding AI investments and margin discipline to drive a gradual re-rating over the next few quarters.Mumbai | October 10
Tata Consultancy Services (TCS) opened the earnings season with a steady set of Q2FY26 results that suggest the worst of the slowdown may be behind India’s largest IT services company. While global discretionary spending remains uneven, the company’s margin expansion, deal wins, and renewed focus on artificial intelligence (AI) are seen as signs of stabilisation. According to PL Capital, the stock presents a 24% upside from current levels as execution efficiency and long-term AI-led investments begin to show results.
Operational Stability in Q2FY26
TCS reported modest topline growth alongside improving profitability, underlining operational discipline in a soft demand environment.
| Key Metrics | Q2FY26 | Q1FY26 | Change (QoQ) |
| Revenue (crore) | ₹62,510 | ₹61,460 | +1.7% |
| EBIT Margin | 25.2% | 24.5% | +70 bps |
| Net Profit (crore) | ₹12,345 | ₹11,870 | +4.0% |
| Deal Wins (bn) | USD 10 | USD 8.2 | +22% |
| Book-to-Bill Ratio | 1.4x | 1.2x | — |
Growth was supported by demand in the India business (up 4% QoQ) and stability in North America and Continental Europe. The company’s manufacturing and energy verticals delivered sequential improvement, even as BFSI and retail remained cautious.
Management Commentary: Efficiency and Early Signs of Recovery
TCS’s management reiterated its focus on efficiency and margin protection while investing in digital and AI-led capabilities.
“We are seeing early signs of discretionary spending coming back, particularly in areas such as cloud migration, analytics, and enterprise AI,” said K Krithivasan, CEO & MD, TCS. “Our priority is to deepen client partnerships while modernising delivery with automation and AI integration.”
The management emphasised continued improvement in utilisation, offshoring, and cost management as key levers for sustaining margins above 25%.
AI and Data Centre Expansion: Long-Term Growth Lever
A major strategic highlight of the quarter was TCS’s announcement of a USD 6–7 billion investment to build 1 GW of AI and data centre capacity across India over the next five to seven years. The plan, to be executed in phases of 150 MW, will serve hyperscalers, large enterprises, and the public sector — forming the backbone of India’s emerging enterprise AI infrastructure.
The company aims to integrate these facilities with its “AI-first delivery framework”, combining large language model-based tools, cloud-native platforms, and secure data systems. PL Capital expects this initiative to become a structural growth driver over the next decade, enhancing client stickiness and high-value project conversion.
Deal Wins Indicate Pipeline Resilience
Deal activity improved sequentially, with total contract value (TCV) reaching USD 10 billion in Q2FY26. One large transformation deal worth USD 600 million came from a European automotive major, while additional wins in healthcare and insurance added to visibility.
The acquisition of ListEngage MidCo LLC, a Salesforce Summit Partner, for USD 72.8 million, will strengthen TCS’s position in digital marketing and customer engagement platforms — a high-margin growth segment.
Margin Performance and Cash Flow Strength
TCS remains the profitability leader among its peers, with EBIT margins of 25.2% and return on equity (RoE) above 40%. Free cash flow conversion exceeded 100%, maintaining strong liquidity of over ₹75,000 crore in cash and investments.
The company announced an interim dividend of ₹10 per share, continuing its policy of consistent shareholder payouts. PL Capital projects margins to remain within 26–28% over the next two years, driven by automation, delivery optimisation, and improving employee productivity.
Valuation: PL Capital’s View
PL Capital retains a ‘BUY’ rating on TCS with a target price of ₹3,800, implying a 24% upside from the current market price of ₹3,062. At these levels, the stock trades at 18.6x FY27E P/E, which the brokerage views as attractive for a company of TCS’s scale, balance sheet strength, and resilience.
The firm estimates USD revenue CAGR of 3.6% and earnings CAGR of 9.4% between FY25 and FY28, supported by gradual improvement in client spending and a recovery in large digital deal flows.
“TCS’s diversified portfolio, stable cash flows, and growing investments in AI-driven delivery models make it a strong long-term compounder,” PL Capital said in its note.
Sector and Market Outlook
The near-term environment for Indian IT remains cautious as clients reassess discretionary budgets. However, early indicators such as rising small-deal conversions, renewal rates, and new digital mandates point towards a bottoming cycle.
PL Capital expects a gradual recovery in FY26, led by healthcare, manufacturing, and cloud modernisation verticals. “Margin sustainability and AI integration will be the key valuation triggers through FY27,” the firm added.
Key Takeaways for Investors
- Rating: BUY
- Target Price: ₹3,800
- Upside Potential: 24%
- Time Horizon: 12–18 months
- Investment Case: AI-led growth, margin stability, strong cash generation
Bottomline
TCS’s Q2FY26 results reaffirm its position as a bellwether of consistency in a volatile IT cycle. While growth remains measured, margin resilience, strong order book, and AI-led transformation underscore the company’s long-term potential. For investors, PL Capital believes TCS remains a core holding in any diversified portfolio — one that may not move fast, but moves steadily, compounding quietly over time.
Read the full report here
