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Tata Consultancy Services Ltd

| Q3 FY26 Earnings Conference Call

BULLISH SENTIMENT

Report Source

⬤16th Jan 26

Summary : TCS reported stable Q3 growth driven by strong AI services and large deal wins, with management expressing confidence in future growth and market recovery despite some current seasonal softness.

Management Perspective positive : We are confident of a good CY2026. We are optimistic that North America will return to better growth. We believe this order book will help us in growing in FY '27 as well.

Concall Report Analysis & Insights

Business Overview

  1. Q3FY26 revenue was ₹67,087 crore, growing 2.0% sequentially and 4.9% YoY in reported currency.
  2. Constant currency revenue grew 0.8% sequentially, with international services up 0.4%.
  3. Operating margin remained stable at 25.2%, excluding one-off items.
  4. AI services generated US$1.8 billion in annualized revenue, growing 17.3% QoQ in constant currency.
  5. Total Contract Value (TCV) for Q3 was strong at US$9.3 billion, including one mega deal.

Future Growth Prospects

  1. Management is confident of a good CY2026, driven by strong deal momentum and AI leadership.
  2. Ambition to become the world's largest AI-led technology services company, guided by a five-pillar strategy.
  3. North America market is expected to return to better growth, with decision-making cycles reducing.
  4. Order book of US$28-29 billion in the first three quarters supports FY27 growth.
  5. AI revenues are expected to continue growing with a strong growth rate.

Management Insights

  1. Growth momentum from Q2FY26 continued into Q3, with strong deal wins across markets.
  2. Operating margins remained stable due to productivity, pyramid optimization, and favorable currency.
  3. Significant investments are being made in AI, talent development, and strategic growth areas.
  4. The company is transforming into an AI-first enterprise, scaling AI solutions for clients and internal operations.
  5. Capital allocation policy remains unchanged, with substantial free cash flow returned to shareholders via dividends.

Signs of Skepticism

  1. Softness in North America and UK geographies was noted, though attributed primarily to seasonality.
  2. Technology Software and Services de-grew due to typical Q3 seasonality and client workforce restructuring.
  3. Agentic AI implementation is proceeding cautiously, despite overall AI adoption increasing.
  4. SG&A expenses increased significantly due to legal, M&A-related fees, marketing, and CSR initiatives.
  5. The new India labor code provision resulted in a one-off charge, with a small ongoing impact expected.

Risk Factors

  1. Ongoing geopolitical uncertainty, trade restrictions, and evolving data/AI regulations.
  2. Workforce restructuring and major layoffs among top clients continue.
  3. Macro uncertainty could impact margin aspirations despite operational efficiencies.
  4. BFSI and Technology Software and Services experienced seasonality and softness.
  5. Pockets of weakness persist in retail, specifically domestic airline, fashion, and specialty segments.

Good To Know

  1. Announced a US$1 billion equity partnership with TPG for GW-scale AI data center infrastructure.
  2. Acquired Coastal Cloud in the U.S. to strengthen Salesforce and AI consulting services.
  3. Hosted an Analyst Day in December 2025, detailing the five-pillar AI strategy.
  4. Recommended an interim dividend of ₹11 per share and a special dividend of ₹46 per share.
  5. Global headcount stands at 582,163, with 217,000+ employees having higher-order AI skills.

Key Drivers

  1. Strong AI services growth.
  2. Large deal wins.
  3. North America market recovery.
  4. Strategic AI investments.

Key Analyst Discussions

Market Trends & Consumer Behavior

  1. Demand environment is improving compared to Q1, with faster decision-making on short-cycle projects.
  2. BFSI and retail businesses showed good pickup, with seasonality being a primary factor for Q3 softness.
  3. International TTH is performing well, offsetting some weakness in domestic airline and fashion/specialty retail.
  4. The impact of recent credit card rate developments in the U.S. is expected to be nuanced, with no major net impact.

Financial Highlights

  1. Analysts questioned the sharp increase in other expenses within SG&A, attributed to legal, M&A, marketing, and CSR.
  2. Management aims to inch closer to the 26%-28% operating margin band, despite ongoing investments.
  3. A one-off provision of ₹2,128 crores was made for the new India labor code, with minimal ongoing impact.
  4. The order book of US$28-29 billion in the first three quarters is expected to support FY27 revenue growth.
  5. BSNL revenue pickup is not expected until formal final PO is received, with an 18-month build-out post anchor customer.

Product Composition

  1. AI revenue growth is driven by business transformation and modernization programs across verticals.
  2. AI implementations have shifted from experimentation to ROI-led scaled deployments.
  3. Renewals typically bake in 10-15% productivity, but the total value of contracts generally doesn't decrease due to increased scope.
  4. TCS proactively deploys AI to achieve productivity gains, often increasing the scope of work at renewal.

Strategic Considerations

  1. Management is aspiring for higher international market growth in FY26 compared to FY25.
  2. The company is actively engaging with customers to build AI foundations and establish competitive advantages with AI.