Tata Consultancy Services’ Q3FY26 performance underscores a structural inflection point rather than a cyclical rebound. Despite muted global IT spending and cautious client budgets, the company delivered steady margins, resilient cash flows, and a decisive acceleration in monetized artificial intelligence deployments. Revenue growth remained modest sequentially, but the quality of growth improved materially, driven by rapid-build AI projects, mega-deal wins, and disciplined cost execution. With AI now transitioning from experimentation to a revenue-core engine, IDBI Capital reiterates its BUY call, citing sustained earnings visibility, robust return ratios, and a target price of Rs 3,733, implying meaningful upside from current levels.

IDBI Capital Reiterates BUY on TCS as AI Shifts From Concept to Core Business

IDBI Capital has reaffirmed its BUY recommendation on Tata Consultancy Services following its Q3FY26 earnings, highlighting a strategic pivot where artificial intelligence is no longer an auxiliary capability but a central profit driver. The brokerage has assigned a target price of Rs 3,733, valuing the stock at 24.4x FY27E earnings, supported by durable margins, strong cash conversion, and expanding AI-led deal pipelines.

At the current market price of Rs 3,236, the implied upside stands at approximately 15 percent, placing TCS firmly within IDBI Capital’s conviction zone for large-cap IT exposure.

Revenue Growth Muted Sequentially, but Underlying Recovery Signals Strength

Sequential revenue growth remained modest at 0.8 percent in constant currency, reflecting persistent macro caution across global enterprise spending. However, year-on-year revenue rose 4.9 percent, indicating that demand conditions are stabilizing rather than deteriorating.

Growth was primarily supported by the Consumer, Energy & Utilities, and Life Sciences & Healthcare verticals, which offset weakness in select geographies such as the UK and North America. IDBI Capital notes that the revenue trajectory reflects a deliberate shift toward quality-led deal execution rather than volume-driven expansion.

Margin Discipline Signals Long-Term Strategic Prioritization

Operating margins stood firm at 25.2 percent (excluding one-offs), despite wage hikes and incremental brand investments. Productivity gains of nearly 80 basis points were largely neutralized by compensation increases and strategic spending, underscoring management’s preference for reinvesting efficiency gains into future readiness rather than short-term margin expansion.

This margin stability, in an environment of cautious demand, reinforces TCS’ operational discipline and its ability to protect profitability across cycles.

AI Revenue Emerges as a Material Earnings Engine

One of the most defining highlights of the quarter was the acceleration in AI-led revenue. Annualized AI revenue surged to USD 1.8 billion, growing 17.3 percent quarter-on-quarter, driven primarily by rapid-build deployments rather than experimental pilot programs.

IDBI Capital emphasizes that TCS is now delivering AI solutions with tangible return on investment for clients, moving decisively from proof-of-concept to production-grade implementations. This transition significantly enhances revenue visibility and positions AI as a scalable, repeatable business vertical.

Deal Momentum Strengthens With Mega Contracts and BFSI Leadership

Total contract value (TCV) for the quarter stood at a robust USD 9.3 billion, supported by large-scale deal wins in North America. The BFSI segment alone accounted for USD 3.8 billion, reinforcing TCS’ leadership in regulated, mission-critical technology outsourcing.

The brokerage notes that deal decision-making is increasingly driven by cost rationalization, governance, and AI integration, areas where TCS maintains a structural advantage.

Cash Flow Strength Enhances Strategic Flexibility

Operating cash flow conversion reached 130 percent of net income, generating approximately USD 1.6 billion in operating cash during the quarter. Days sales outstanding remained stable at 76 days, reflecting strong client confidence and disciplined receivables management.

This cash strength provides TCS with ample flexibility to invest in infrastructure, acquisitions, and workforce upskilling without compromising shareholder returns.

Workforce Upskilling Anchors AI Execution Capability

TCS has upskilled and cross-skilled more than 217,000 employees in AI-related competencies, representing a nearly threefold increase year-on-year. Attrition stood at a manageable 13.5 percent, while internal hackathons and patent development initiatives continue to deepen the company’s intellectual capital.

IDBI Capital views this workforce transformation as a critical differentiator, particularly as clients demand agentic AI and enterprise-scale deployments.

Strategic Partnerships Expand the AI Infrastructure Stack

The company’s USD 1 billion partnership with TPG for data centers and the acquisition of Coastal Cloud strengthen its infrastructure-to-intelligence continuum. These initiatives enhance TCS’ hyperscaler co-innovation capabilities and improve its ability to deliver end-to-end AI transformation programs.

Such moves reinforce TCS’ positioning as an infrastructure-enabled AI services leader rather than a point-solution vendor.

Valuation, Investment Levels, and Outlook

IDBI Capital values TCS at 24.4x FY27E EPS, with earnings projected to grow steadily to Rs 153 per share by FY27. Return ratios remain best-in-class, with ROE nearing 49 percent and ROCE above 59 percent, supported by a debt-free balance sheet.

Investment Levels:

CMP: Rs 3,236

Target Price: Rs 3,733

Upside Potential: ~15 percent

Recommendation: BUY

IDBI Capital expects CY2026 to mark a gradual acceleration in developed market growth, with Europe and emerging regions offsetting near-term softness in North America and the UK.

Bottom Line: AI-Led Transformation Strengthens Long-Term Investment Case

TCS’ Q3FY26 performance confirms that the company is navigating macro headwinds with precision while laying the foundation for its next growth cycle. The monetization of AI, resilient margins, strong cash flows, and strategic investments collectively reinforce earnings durability.