Shareholders cheered Tata Consultancy Services (TCS) Ltd’s second-quarter report card, sending its stock up nearly 6% on Friday – a day after the earnings announcement – reflecting optimism in its strategy to prioritize growth over profitability.
The company ended the September quarter with $7.64 billion in revenue, up 0.2% sequentially and 2.36% year-on-year. Much of this growth was driven by banking clients, offsetting a revenue drop in India, though the performance still marked the company’s slowest second-quarter growth in three years.
Despite this, the company’s shares jumped 5.85% on the Bombay Stock Exchange on Friday, reflecting investor confidence in its near-term strategy and resilience in a challenging macroeconomic environment where demand for tech services remains subdued.
During the post-earnings call with analysts, management said it expects demand to remain dynamic, even if pursuing it weighs on operating margins, which have already come under pressure from rising subcontractor costs and deal ramp-ups in the coming quarter.
Management attributed much of this margin drag to TCS’s $373-million acquisition of Porsche’s IT and consulting unit, MHP, announced in August. The deal is expected to shave 50 basis points off operating margins later this fiscal year.
Brokerages weigh in
At least four brokerages said the Mumbai company’s performance was broadly in line with estimates.
“The improving mix across BFSI (banking, financial services and insurance), manufacturing, and technology services provides some visibility for sustained momentum in international markets,” Motilal Oswal Financial Services analysts Abhishek Pathak, Keval Bhagat and Suket Kothari said in a note dated 8 October.
A second brokerage said deals signed by TCS may add to its revenue. “Besides Porsche, if the other customers of MHP are also going to be serviced by TCS (assuming it retains them), we believe this deal can add around 2% to the turnover of TCS on an annualized basis,” Bank of Baroda Capital Markets analysts Girish Pai and Lopa Notaria said in a note dated 9 October.
A third brokerage gave the company’s AI order book a thumbs up. “Annualized AI revenue growth remained a key positive, up around 19% quarter-on-quarter to $ 3.1 billion and crossing the 10% mark of overall revenue,” 360 ONE Capital Research analysts Pulkit Chawla, Arth Gandhi and Sanchit Jain said in a note dated 8 October.
A fourth brokerage concurred. “We were encouraged by continued Al momentum, including growing demand for Al governance and agentic control plane deployments. Ultimately, we await further evidence that Al demand can more than offset ongoing discretionary pressure and AI-driven efficiency gains and become a meaningful driver of topline growth,” BMO Capital Markets’ Keith Bachman said in a note dated 8 October. He added that TCS’s outlook aligns more closely with peers such as Infosys and Cognizant than with Accenture.
Margin headwinds persist
For now, profitability remains TCS’s main hurdle. Operating margins remained unchanged at 24% during a quarter that typically supports margin expansion.
Management attributed this pressure to rising subcontractor expenses, warning that maintaining profitability in the coming months will be challenging as the company continues investing in strategic partnerships to future-proof its business.
“Margins are likely to remain constrained due to investments for growth in AI, partnerships, sales and acquisitions,” ICICI Securities analysts Ruchi Mukhija, Aditi Patil and Seema Nayak said in a note dated 9 October.
Management noted that while non-essential tech spending remains under strict scrutiny, TCS is well-positioned to convert pipeline opportunities into growth as enterprise adoption of AI scales and client budgets recover.
On AI, management highlighted three distinct demand patterns, including AI-native solutions with business outcomes, AI-led transformation of enterprise systems, and clients prioritising software and hardware modernization to house AI.