Q3 Performance Meets Expectations

Tata Consultancy Services (TCS) reported a Q3 FY26 performance that was largely in line with subdued market expectations, navigating a seasonally weak quarter with resilience. The company's reported profit saw an impact from a one-off provision related to the Labour Code and restructuring expenses. However, the underlying financial health demonstrated stability, with revenues posting a modest sequential increase and operating margins holding steady.

Revenue Growth Drivers

For the third quarter of fiscal year 2026, TCS recorded a sequential revenue growth of 0.6 percent in reported currency, or 0.8 percent in constant currency terms. International service revenue saw a 0.4 percent sequential uptick. Growth varied across geographies, with India showing strength while major developed markets, including the US, experienced softness, largely attributed to typical third-quarter seasonality. Key verticals like hi-tech and BFSI (banking, financial services, and insurance) were impacted, though other industry segments exhibited sequential improvements.

Margin Resilience and Outlook

Operating margins proved resilient despite the residual impact of annual wage hikes. Efficiency gains and favorable currency movements contributed positively to margins by approximately 80 and 20 basis points respectively. These were counteracted by wage increases and investments in brand building and partnerships, each impacting margins by about 50 basis points. Analysts suggest that achieving margin targets, such as the aspirational level exceeding 26 percent, would necessitate a more significant acceleration in revenue growth.

Order Bookings and AI Ambitions

Deal wins for the quarter reached $9.3 billion, notably supported by a substantial mega-deal secured in North America. The company maintains a healthy sales pipeline and expressed optimism regarding its performance trajectory in calendar year 2026. TCS's strategic pivot towards becoming an AI-first company is palpable, evidenced by ongoing net headcount reductions and a concerted focus on re-skilling existing employees and hiring talent with specialized AI expertise. While TCS is positioned to be a significant partner in clients' AI, cloud, and data initiatives, the market has yet to see substantial momentum from this transition.

Growth Challenges and Valuation

Given its notable underperformance over the past year, TCS's valuation is currently considered undemanding, offering a pre-tax dividend yield exceeding 3 percent. However, the company is not expected to exit its prolonged phase of sluggish growth rapidly. This outlook positions TCS as a stock less suited for investors prioritizing rapid capital appreciation. Key risks to its performance include a potential significant cut in IT spending due to global macroeconomic slowdowns or major disruptions stemming from advancements in artificial intelligence.