TCS Q3 delivers steady show, brokerages split on growth outlook

TCS Q3 results impact: The common thread across analysts is that while Q3 execution remains strong and margins resilient, clear visibility on broad-based demand acceleration is still missing.

Tata Consultancy Services (TCS) delivered a steady third quarter of financial year 2026 (Q3FY26) with a modest beat on revenue and margins, but brokerages remain divided on whether the country’s largest IT services exporter is on the cusp of a durable growth recovery or merely navigating through pockets of demand amid a still-uncertain macro environment.

 

The common thread across analysts is that while execution remains strong and margins resilient, clear visibility on broad-based demand acceleration is still missing.

Modest revenue beat, margins hold firm

TCS reported Q3FY26 revenue of $7.51 billion, up 0.8 per cent quarter-on-quarter (Q-o-Q) in constant currency terms, marginally ahead of Street expectations. Nomura noted that the performance exceeded Bloomberg consensus, even as international business growth stayed muted at 0.4 per cent Q-o-Q due to seasonal softness in key markets. North America grew just 0.1 per cent Q-o-Q in constant currency, while the UK declined 1.9 per cent, with BFSI, TCS’ largest vertical, down 0.4 per cent Q-o-Q.

 

 

Despite these headwinds, operating performance remained stable. Adjusted Ebit margin came in at 25.2 per cent, flat sequentially and ahead of most estimates. Brokerages broadly agreed that productivity gains, operational efficiencies, pyramid optimisation and favourable currency movements helped offset the residual impact of wage hikes and higher SG&A expenses related to brand-building and legal costs. 

 

Motilal Oswal termed the quarter “safe”, highlighting that margins held up better than expected despite ongoing investments and salary increases. Systematix also pointed to margins being “largely intact”, supported by efficiency gains even as spending on strategic initiatives continued.  ALSO READ | New labour codes, restructuring and provisioning impact TCS' Q3 profit

Reported profits hit by one-offs

Reported profitability, however, was clouded by one-off costs. Nomura highlighted that reported EPS fell about 14 per cent year-on-year (Y-o-Y), mainly due to provisions under India’s new labour code, restructuring expenses and legal costs. TCS took ₹2,130 crore towards higher gratuity and leave encashment liabilities, ₹250 crore in restructuring charges and about ₹1,000 crore for legal claims during the quarter.

 

Most brokerages treated these as non-recurring. Motilal Oswal and Antique Stock Broking, however, focused on adjusted profit, noting that core earnings trends remain healthy once exceptional items are excluded.

Deal wins steady, but not yet decisive

A key area of convergence among analysts was deal momentum. TCS reported total contract value (TCV) of $9.3 billion in Q3FY26, down about 9 per cent Y-o-Y, with a book-to-bill ratio of around 1.2x. The quarter included one mega deal in the BFSI vertical, while the trailing twelve-month deal wins were marginally higher year-on-year.

 

Nomura said the deal pipeline and sequential improvement in demand, from Q1 to Q3, support management’s view that calendar year 2026 would be better than 2025 for major markets. However, it cautioned that this has yet to translate into clear growth leadership.

 

Motilal Oswal described deal momentum as “reasonable”, adding that while it supports near-term visibility, management continues to flag volatility in deal timing. The brokerage said a healthier mix of short-cycle deals and higher annual contract value (ACV), especially in AI-led projects, would be key signals of a sustained recovery.  ALSO READ | TCS sees continued headcount decline despite higher fresher intake

AI emerges as a bright spot

Artificial intelligence was one of the strongest common positives flagged by brokerages. Antique Stock Broking and Systematix noted that annualised AI services revenue reached $1.8 billion, growing over 17 per cent sequentially in constant currency terms. Analysts said AI projects are increasingly moving from proof-of-concept stages to larger, revenue-generating engagements.

 

Management commentary suggested that AI-led transformation, modernisation and data-centric programs are beginning to form a more meaningful part of the order book. Still, some analysts cautioned that large AI infrastructure initiatives, such as data centre programs, remain long-gestation and may not immediately drive topline acceleration.

Margins: Resilience today, growth needed tomorrow

 

On margins, there was broad agreement that near-term stability looks achievable, but major expansion will require stronger revenue growth. Nomura said achieving TCS’ aspirational 26-28 per cent Ebit margin band would be difficult without a meaningful growth lift, forecasting margins of around 25 per cent over FY26-27.

 

Systematix and Antique shared similar views, noting that while management remains confident of moving closer to the long-term margin band over time, macro uncertainty and continued investments could cap upside in the absence of stronger demand.

 

Divergent calls on valuation

 

Brokerage views diverged most sharply on valuation and ratings. Nomura retained a ‘Neutral’ rating with a target price of ₹3,300 due to lack of visibility on growth leadership and limited margin upside. Contrastingly, Motilal Oswal reiterated a ‘Buy’ with a target of ₹4,400, arguing that steady execution, deal visibility and margin resilience offer a favourable risk-reward.

 

Antique Stock Broking and Centrum Broking also maintained ‘Buy’ ratings, pointing to improving demand visibility, AI-led traction and relatively inexpensive valuations. Systematix raised its target price to ₹3,817, noting that the stock trades at a discount to its long-term average multiple, offering an attractive entry point despite lingering risks.

 

That said, brokerages agree that TCS remains a steady executor, with margins holding up and investments in areas such as AI beginning to bear fruit. However, with discretionary spending yet to recover meaningfully and growth still coming from select pockets, views differ on how quickly the IT bellwether can return to sustained growth leadership.   

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