In its latest equity research, Choice Equity Broking has reiterated a 'BUY' recommendation on Tata Consultancy Services (TCS), India’s largest IT services exporter. Despite a marginal miss on Q4 FY25 earnings expectations, the brokerage remains bullish on the long-term outlook, driven by a robust deal pipeline, strategic investments in AI, and resilient operating metrics. The firm has revised its target price downward to Rs 3,950, implying a 21.6% upside from the current market price of Rs 3,247. However, analysts caution that global macroeconomic uncertainties could delay deal conversions, thereby affecting short-term revenue visibility.

Q4 FY25: A Mixed Bag with Narrow Earnings Miss

TCS reported consolidated revenue of Rs 644.8 billion for Q4 FY25, reflecting a 5.3% YoY and 0.8% QoQ increase—slightly below the consensus estimate of Rs 648.4 billion. EBIT came in at Rs 156 billion, showing a 2% decline YoY and a 0.4% drop QoQ, with EBIT margins slipping to 24.2%. Net profit for the quarter was reported at Rs 122.2 billion, representing a 1.7% YoY contraction.

The margin decline was largely attributed to wage hikes, promotions, and strategic investments. Although currency movement provided a modest offset, the margin erosion was more pronounced than expected. Attrition remained elevated at 13.3%, and headcount rose marginally by 625 employees.

Strong Deal Wins but Conversion Risks Persist

One of the quarter's standout highlights was the USD 12.2 billion Total Contract Value (TCV), TCS’s second-highest ever. This was accomplished without any mega-deals, showcasing a broad-based demand across North America, BFSI, and consumer verticals. The FY25 pipeline stands strong at USD 39.4 billion.

However, Choice warns of potential delays in revenue recognition from these deals, citing decision-making lags and cautious discretionary spending amid global uncertainties. Sectors such as insurance, healthcare, retail, and automotive have witnessed intensified scrutiny, which could impact topline performance in FY26.

Operational Margins Under Pressure But Long-Term Range Maintained

Despite recent margin compression, TCS continues to guide for a long-term EBIT margin band of 26–28%. FY25 closed with an EBIT margin of 24.3%. The brokerage expects improvement in FY26 supported by efficiency gains, the wind-down of the BSNL contract, and favorable revenue mix. However, the absence of currency tailwinds and elevated operating costs could keep margins volatile in the near term.

AI and GenAI Driving New Business Momentum

TCS’s strategic pivot towards AI and GenAI is gaining traction. Over 580 AI-centric engagements were executed or initiated in Q4. Key offerings include the TCS OmniStore—an AI-driven commerce suite—and Ignio’s Code Accelerator, a tool that streamlines code generation and transformation.

Notably, the Life Sciences vertical is utilizing GenAI to improve clinical trial productivity and drug development timelines. This technological thrust positions TCS favorably in capturing digital transformation mandates across industries.

Guidance and Revised Estimates

Choice Broking has revised its financial estimates downward in light of macro risks. Revenue is projected to grow at a CAGR of 7.2% between FY25 and FY27, with EBIT and PAT expected to clock CAGR of 10.7% and 10.8% respectively. The FY27 EPS has been revised to Rs 164.6, and the target valuation of Rs 3,950 is based on a 24x forward P/E multiple.

Geographic and Vertical Growth Trends

Geographically, North America and Europe saw sequential upticks of 0.2% and 1.2% respectively. India, however, witnessed a steep decline of 13.2% QoQ. On a YoY basis, India remained strong with a 33% growth, followed by MEA (13.2%) and APAC (6.4%).

In terms of verticals, BFSI showed resilience despite broader sectoral pressures, contributing 31.2% of revenue. Retail, Healthcare, and Communication remained muted due to client caution.

Key Financial Metrics and Valuation

• FY25 Revenue: Rs 2,553.2 billion
• FY26 Revenue Estimate: Rs 2,713.4 billion
• FY27 Revenue Estimate: Rs 3,013.5 billion
• FY27 Estimated PAT: Rs 595.5 billion
• FY27 Estimated EPS: Rs 164.6
• Return on Equity (FY27): 57.7%
• Current PE Ratio: 24.2x; Target PE: 24x

The dividend yield stands at 1.7%, with a potential total return of 23.3% over the next 12 months based on the current CMP of Rs 3,247.

Investment Recommendation and Technical Outlook

Choice Broking reiterates a ‘BUY’ call on TCS, adjusting the target price to Rs 3,950. The key support level is seen at Rs 3,050, while resistance lies near Rs 3,480. A breakout above Rs 3,500 could trigger momentum toward the revised target.

From a medium-term perspective, the stock remains fundamentally sound, backed by sector leadership, robust financials, and a growing digital portfolio. Investors with a 12–18 month horizon may consider accumulating on dips for potential upside.