TCS Posts Steady Q3 Revenue Beat; Analyst Growth Views Diverge Sharply
Overview
Tata Consultancy Services delivered a steady Q3 FY26, beating revenue expectations and maintaining resilient margins despite one-off charges. However, analysts remain divided on the IT giant's growth trajectory, citing strong execution but a lack of broad-based demand acceleration amidst global economic uncertainty. AI services show strong sequential growth, offering a potential future catalyst.
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TCS Q3 Performance: Steady Show Amidst Divided Growth Outlook
Tata Consultancy Services (TCS) delivered a steady third quarter for FY26, marginally beating revenue expectations and holding firm on margins, though analysts remain divided on its future growth prospects. The IT services giant reported $7.51 billion in revenue, up 0.8% quarter-on-quarter in constant currency, with adjusted Ebit margins stable at 25.2%. However, reported profits were impacted by significant one-off costs.
Revenue and Margins Edge Past Estimates
TCS's top line performance, exceeding Bloomberg consensus, was primarily driven by stable operational execution. International business growth remained subdued at 0.4% Q-o-Q in constant currency. North America saw minimal growth at 0.1%, while the UK contracted 1.9%. The crucial BFSI vertical, TCS’s largest, also experienced a slight dip of 0.4% Q-o-Q. Despite these headwinds, productivity gains, operational efficiencies, and favourable currency movements helped offset wage hike impacts and higher expenses, keeping adjusted Ebit margins at 25.2%.
One-Off Costs Cloud Reported Profit
Reported profitability faced a significant drag from one-off charges totaling over ₹3,380 crore. These included provisions for new labour code liabilities (₹2,130 crore), restructuring expenses (₹250 crore), and legal provisions (₹1,000 crore). These factors caused a year-on-year drop of approximately 14% in reported EPS. Analysts largely viewed these as non-recurring, with core earnings trends remaining healthy once adjusted.
Deal Wins and AI Momentum
Total contract value (TCV) for the quarter stood at $9.3 billion, a 9% year-on-year decline, with a book-to-bill ratio of around 1.2x. While the deal pipeline shows sequential improvement and supports management's outlook for a better calendar year 2026, clear growth leadership remains elusive. A bright spot was artificial intelligence, with annualized AI services revenue reaching $1.8 billion, surging over 17% sequentially in constant currency. AI projects are increasingly progressing from proof-of-concept to revenue-generating engagements.
Divergent Analyst Views on Valuation
Brokerages remain split on TCS's valuation and future potential. Nomura maintained a 'Neutral' rating, citing limited visibility on growth leadership and margin upside. Conversely, Motilal Oswal reiterated a 'Buy', highlighting steady execution, deal visibility, and margin resilience. Antique Stock Broking and Centrum Broking also maintained 'Buy' ratings, pointing to improving demand, AI traction, and attractive valuations. Systematix raised its target price, suggesting the stock offers an attractive entry point despite lingering market uncertainties.
