In its latest research note, Sharekhan has reiterated a ‘BUY’ call on Tata Consultancy Services (TCS), India's largest IT services provider, despite a softer-than-expected Q4 FY25 performance. The company missed revenue and profit estimates, primarily due to tactical interventions, seasonality, and continued macroeconomic uncertainty. However, robust deal wins, an expanding GenAI pipeline, and a Rs 39.4 billion order book have reinforced long-term optimism. Sharekhan has revised the fair value of TCS to Rs 4,050, implying a significant upside from the current market price of Rs 3,246, with valuations now appearing attractive at 21x FY27E EPS.

Q4 FY25 Snapshot: Margins Contract, But Order Wins Impress

TCS reported revenue of $7.465 billion, representing a 1% quarter-on-quarter decline, slightly missing Street expectations. In rupee terms, revenue stood at Rs 64,479 crore, up 0.8% sequentially and 5.3% year-on-year. However, the EBIT margin fell 30 basis points QoQ to 24.2%, trailing Sharekhan’s estimate of 24.8%.

Net profit came in at Rs 12,224 crore, down 1.3% QoQ, while the EPS stood at Rs 33.8. The company attributed margin pressures to merit-based increments, promotions, and higher strategic marketing outlays, partially cushioned by favorable currency movement and improved revenue mix.

Order Book Momentum: $12.2 Billion in TCV Fuels Optimism

One of the most positive takeaways from the Q4 report was TCS’s total contract value (TCV) of $12.2 billion, up 20% sequentially. North America contributed $6.8 billion, with BFSI and consumer business accounting for $4 billion and $1.7 billion, respectively.

Book-to-bill ratio improved to 1.6x, underscoring robust conversion of orders into billable projects. The full-year order book now stands at an impressive $39.3 billion, providing strong visibility into FY26 earnings.

Vertical and Geographic Trends Reflect Mixed Recovery

TCS reported diverse performance across industries and regions:

Top-performing verticals included regional markets (+22.5% YoY), energy (+4.6%), and BFSI (+2.5%), driven by modernisation, cost optimisation, and increased AI adoption.

On the flip side, life sciences (-5.6%), manufacturing (-2.9%), and communications (-9.8%) witnessed YoY declines.

In terms of geography, India led with a 33% YoY growth, followed by MEA (+13.2%) and APAC (+6.4%). In contrast, North America dipped 1.9% YoY in constant currency terms, primarily due to caution around discretionary spending.

Demand Environment: Macro Headwinds Persist, but AI is a Silver Lining

TCS management painted a cautiously optimistic picture. While decision-making remains slow in sectors like U.S. insurance and consumer discretionary, interest in AI, GenAI, and cloud services continues to rise.

Client IT budgets are flat, but incremental investments are being funded via savings from operational efficiencies. Management expects FY26 to outperform FY25, backed by execution of large deals and pivot to high-margin offerings.

Operational Highlights: Headcount Stabilises, Attrition Inches Up

TCS added 625 employees in Q4FY25, bringing its total headcount to 609,979.

LTM attrition rose slightly to 13.3% from 13% in the previous quarter.

The company hired 42,000 freshers in FY25 and plans to hire at least a similar number in FY26, with an emphasis on AI-capable talent.

These numbers signal stabilization in talent management, which is crucial as TCS focuses on AI-driven services.

Valuation and Investment Outlook: Compelling Opportunity After Correction

TCS is now trading at 21x FY27E EPS, which Sharekhan considers attractive given the company’s superior execution capabilities and deal visibility. The stock has corrected ~40% from its 52-week high, making it a compelling long-term buy.

Current Market Price (CMP): Rs 3,246

Target Price: Rs 4,050

Upside Potential: ~25%

Valuation Basis: 25x FY27E EPS

Sharekhan expects a Sales/PAT CAGR of 6.4%/7.9% over FY24–FY27E, and believes TCS is well-positioned to capitalize on cost optimisation, GenAI transformation, and digital services growth.

Risks to Monitor: Currency and Macroeconomic Uncertainty

Despite the positive outlook, key risks remain:

Rupee appreciation and adverse FX movements could pressure margins.

A potential U.S. recession or prolonged discretionary spend freeze may moderate tech investments.

Execution delays or cost overruns in large AI and cloud projects could affect profitability.

Investors should closely watch macro indicators and client IT budget trends in North America and Europe—TCS’s primary markets.

Conclusion: A Long-Term Compounder With Cyclical Tailwinds Ahead

TCS’s Q4 results may not have sparked euphoria, but the underlying strength of its business model, diversified client base, and forward-looking investments in AI, GenAI, and cloud make it a formidable force in the Indian IT sector. With a solid $39.3 billion order book, resilient margins, and attractive valuations post-correction, the stock offers an appealing risk-reward equation.

Sharekhan’s revised target of Rs 4,050 reflects confidence in TCS’s ability to navigate global headwinds while capitalising on structural tech tailwinds. Long-term investors would be wise to consider TCS not just as a defensive IT bellwether, but a strategic compounder in the age of enterprise digital transformation.