TCS shares: JM Financial meets management; here's what it says

JM Financial, which met Tata Consultancy Services (TCS) management recently, said the September quarter is expected to be better than the June quarter, noting that client conversations continue to indicate decent demand despite persistent macroeconomic uncertainty. The brokerage said TCS is seeing an increasing number of sizeable legacy-modernisation deals, typically worth $5-$10 million, across verticals. 

The management, it said, indicated there was no pricing pressure in these newer modernisation deals, although competitive intensity remains elevated across renewals and negotiations. 

On Tuesday, TCS shares were down 1.18 per cent at Rs 2,244.50 on BSE over its previous close of Rs 2,271.40. The stock has hit a 52-week high of Rs 3,336.70 and a low of Rs 1,976, according to the latest market data. JM Financial had in August suggested a target of Rs 2,284 on the stock. 

Demand outlook

JM Financial said TCS management expects FY27 to be better than FY26, with client spending remaining focused on productivity, modernisation and vendor consolidation. The brokerage noted that an improvement in the macro environment could help client discussions translate into actual spending.

Management also believes high-single-digit revenue growth could return over the medium term once productivity-led deflation is fully absorbed into the base. 

The BFSI and Technology verticals remain healthy, while Consumer Products and Life Sciences & Healthcare are expected to remain soft in the near term. Manufacturing is expected to benefit from the ramp-up of the $800 million SKF deal, which has a five-year tenure. 

AI services revenue crosses $2.6 billion

TCS' annualised AI services revenue crossed $2.6 billion in Q1FY27 and continues to grow, according to the brokerage. The company is also seeing more sizeable legacy-modernisation engagements across verticals, with the newer deals typically having shorter tenures and no pricing pressure. 

TCS is continuing to invest in partnerships and solutions while maintaining its focus on profitability, even as competition remains high across renewals and negotiations. 

Margins

Management expects its EBIT margin to improve sequentially through the rest of FY27 as wage hikes are now behind it. TCS is targeting an exit EBIT margin of 25 per cent or more for FY27, although the ramp-up of BSNL and the integration of MHP could weigh on the trajectory. 

JM Financial noted that TCS expects to improve margins through operational efficiencies over the next three quarters. Currency, however, is unlikely to provide a meaningful incremental benefit in Q2FY27. 

Buyback remains an option

TCS remains eligible for a buyback, with the board considering dividend and buyback options from time to time, according to JM Financial. The brokerage said the stock was trading at around 14.4 times one-year forward consensus earnings per share. On BSNL, the final purchase order is yet to be received. Some revenue could start contributing in Q2, while a full ramp-up could take six to nine months. Management indicated that the new opportunity is likely to be smaller than the previous BSNL engagement.