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TCS: Muted Quarter with demand recovery remaining uneven, downgrade to Hold

ICICIdirect Research 10 Jul 2026 DISCLAIMER

TCS reported a muted Q1FY27 with revenue of US$7.62 bn (+0.4% QoQ CC/ +3.2% YoY CC). Margins were under pressure as EBIT margin declined 130 bps QoQ to 24%, mainly due to annual wage hikes (~170 bps impact). However, management reiterated its confidence of reaching exit margins EBIT margins to 25%+ during FY27.
In an otherwise muted quarter, the positive was on the AI front. Annualized AI services revenue increased to US$2.6 bn, up 13.6% QoQ, now contributing 8.5% of revenue. Notably, management highlighted that AI revenues are lumpy in nature and AI-led productivity gains of 10–15% are now being shared with clients, with new AI transformation opportunities helping to offset the impact of pricing pressure.
On the deals front, TCS closed Q1 with a US$9.5 bn TCV (-21% QoQ/ +1% YoY), slightly modest in our view, despite net-new 5-year US$800mn SKF AI-led transformation mega deal.
Segment wise, Consumer Business continues to be weak due to geopolitical uncertainties, while management expects Manufacturing and Life Sciences to gradually recover from Q2 onwards. So, overall, demand recovery remains uneven, revenue growth remains muted (amid AI led deflation) and a broad-based recovery in discretionary spending is yet to materialize. We have thus downgraded to HOLD at a TP of ₹2,200 (14x FY28E EPS).

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