Street cautious on TCS near-term outlook despite solid Q2 and AI ambitions

Shares dip after Q2 profit misses estimates; brokerages cite solid AI plans and margin gains but flag weak near-term growth visibility

Shares of Tata Consultancy Services (TCS), the country’s largest IT services company, slipped as much as 1.53 per cent on Friday before narrowing losses to close 1.1 per cent lower at around ₹3,028 apiece. The decline followed the company’s second-quarter (Q2FY26) earnings, where net profit came in below Street estimates, even as revenue and margins were in line.

 

The stock has fallen 26 per cent so far this year, compared to a 6.7 per cent gain in the benchmark Nifty 50. While the immediate trigger was the September quarter results, the Street going ahead will focus on TCS’ plans for an AI data centre, headcount reduction and margin impact, deal momentum, and inorganic growth opportunities. While brokerages were positive on the company’s AI pivot, they remained cautious about its near-term outlook.

 

Nuvama Institutional Equities said revenue and operating profit margin came in ahead of estimates, while profit was in line. While TCS delivered a decent quarter amid low expectations, its plan to invest in an AI data centre positions it at an interesting juncture, the brokerage said, trimming its FY26 and FY27 earnings per share (EPS) estimates by 2 per cent each, citing a slightly weaker growth outlook.

 

Nuvama maintained its ‘buy’ rating on TCS, with a revised target price of ₹3,650 (earlier ₹3,950), citing attractive valuations and strong dividend yield. While near-term volatility may persist, it believes the stock remains compelling from a medium-to long-term perspective.

 

Nomura, meanwhile, retained its neutral stance, noting that management continues to expect FY26 to be better than FY25 for major markets. The brokerage also trimmed its FY26 EPS estimate by around 2 per cent to account for restructuring costs expected in the second half of FY26. It has maintained its target price of ₹3,300.

 

Motilal Oswal Research said TCS delivered a strong Q2FY26 performance despite prevailing challenges, with the India business continuing to show robust growth. While the management indicated that FY26 growth should be better than FY25, the brokerage described this guidance as “somewhat fuzzy”.

 

On the recently announced data centre venture, it said further clarity was awaited on the capital structure, capital expenditure schedule, and details like potential rentals and signed memorandums of understanding (MoUs). The brokerage noted that valuations remain undemanding and reiterated its ‘buy’ rating on TCS with a target price of ₹3,500.

 

Nirmal Bang Research said TCS’ strong deal pipeline, strategic investments in AI and GenAI, leadership in Cloud and cybersecurity, and entry into the data centre business position it well for long-term growth. However, the brokerage remains cautious in the light of the global economic uncertainty and believes that discretionary spending will be dry for FY26. However, given attractive valuations, it has upgraded the company stock to a ‘buy’.

 

Operating profit margins for the IT major expanded 70 basis points (bps) quarter-on-quarter to 25.2 per cent, ahead of estimates. Gains from currency (80 bps), pyramid structure (40 bps), and efficiency improvements (20 bps) offset the one-month impact of wage hikes (-70 bps).

 

On the headcount front, JM Financial Research points out that the 3 per cent sequential reduction in headcount (including 1 per cent through involuntary attrition), with another one percent involuntary reduction ahead indicate a durable reset in cost base. This should either help TCS improve margins or allow it to invest for growth, improving earnings visibility in either scenario, says the brokerage that has a ‘buy’ rating on the stock.

 

The company’s total contract value (TCV) for the quarter stood at $10 billion, up from $9.4 billion Q-o-Q and 20 per cent higher year-on-year from $8.3 billion in Q2FY25. The IT major also announced the acquisition of US-based ListEngage for $72.8 million (around ₹646 crore). This strategic acquisition strengthens TCS’ Salesforce capabilities, adding specialisations across the full range of Salesforce marketing tools.