Motilal Oswal has reiterated a “Buy” recommendation on Tata Consultancy Services (TCS), assigning a target price of Rs 3,850, implying a potential upside of 19%. Despite short-term revenue pressure, especially from the BSNL account ramp-down and subdued discretionary IT spending, the brokerage remains confident in TCS's long-term prospects. Strong deal wins in Q4FY25, margin stabilization strategies, and robust international demand are expected to act as tailwinds. Investors are advised to look beyond the temporary slowdown and focus on TCS’s resilience, exceptional execution, and superior return ratios.

Revenue Softness Driven by Domestic Weakness

TCS reported a quarterly revenue of USD 7.5 billion, marking a 1% sequential decline, falling short of expectations. This softness was primarily driven by a steep 15% quarter-over-quarter (QoQ) fall in Indian revenues due to the BSNL deal wind-down. Other verticals experienced a modest dip of approximately 1% QoQ. In contrast, growth in Europe (+2%) and stability in the U.S. market offered some cushion.

Full-year FY25 revenue reached USD 30.2 billion, registering a 4.2% YoY increase in constant currency. Looking ahead to FY26, TCS expects continued international strength but remains cautious about the domestic market’s drag.

Profit Margins Under Pressure, But Recovery Expected

The operating margin for Q4FY25 contracted by 30 basis points to 24.2%, largely due to employee promotions and an increase in strategic spending. These actions weighed heavily on profitability, but they were described as tactical and non-recurring. Management noted that the BSNL wind-down is expected to reduce subcontracting costs, which should support margin expansion in FY26.

Motilal Oswal projects EBIT margins to improve to 25.3% in FY26, supported by internal productivity measures, optimized resource deployment, and easing of one-time personnel expenses.

Robust Deal Pipeline Despite Lack of Mega Contracts

Deal wins for Q4FY25 were a standout, with a total contract value (TCV) of USD 12.2 billion, up 20% sequentially. While this was 8% lower YoY, the absence of mega deals makes this figure more impressive, reflecting a healthy mix of mid- and small-sized deals across geographies.

The FY25 total deal TCV closed at USD 39.4 billion, delivering a book-to-bill ratio of 1.6x, offering visibility for future quarters.

FY26 Guidance: International Markets in Focus

Management expects FY26 to be stronger than FY25, driven by international growth and stabilizing discretionary spend. However, the outlook is clouded by the BSNL account's absence, which is expected to negatively impact overall revenue growth. TCS is exploring domestic market opportunities to compensate for this void.

Geographically, Europe and the Middle East showed signs of resilience, while the U.S. remained flat. India is likely to see revenue contraction in the early quarters of FY26.

BFSI Leads Growth, Retail and Communications Lag

TCS’s BFSI segment grew 1.3% QoQ and remains the anchor vertical. The company continues to see opportunities in regulatory spending, digital modernization, and platform upgrades in banking.

Retail, Communication & Media, and Life Sciences verticals showed weakness during Q4FY25, reflecting macroeconomic headwinds and reduced discretionary budgets.

Employee Metrics and Dividend Payout

TCS added 625 employees in Q4FY25, taking its total headcount to 607,979. Attrition stood at 13.3%, up from 12.5% in the previous quarter but still within comfortable levels. AI’s influence on hiring remains marginal, though over a third of engagements now involve GenAI.

The company declared a final dividend of Rs 30 per share, reaffirming its strong capital return policy with a payout ratio of approximately 94%.

Valuation and Target Price Outlook

Despite the near-term uncertainties, TCS remains a fundamentally strong player with best-in-class margins and execution capabilities. Its consistent deal wins, disciplined cost structure, and proactive response to market challenges underpin Motilal Oswal’s bullish stance.

The brokerage has maintained a target price of Rs 3,850, valuing the stock at 25x FY27 earnings, translating into a potential upside of 19% from the current market price of Rs 3,247.

Key Investment Highlights

• Revenue growth CAGR of ~3.1% in USD terms is projected for FY25–27.
• EPS is expected to grow at a CAGR of ~6.8%, reaching Rs 153.1 in FY27.
• ROE is estimated to climb to 55% by FY27, with RoCE at 45.8%.
• Dividend yield will likely improve to 4.4% by FY27.

Long-Term Fundamentals Intact Despite Cyclical Volatility

TCS is navigating a phase of macro-induced revenue turbulence with strategic foresight. Its commitment to operational efficiency, strong deal execution, and market leadership solidify its position as a long-term compounder. Investors seeking stable returns in the Indian IT sector can view TCS as a core portfolio holding, especially with a 19% upside potential and improving margin trajectory over the medium term.