TCS: Will $6.5 billion AI data center create strong value for shareholders? 

While announcing its quarterly results, the TCS board approved the creation of a TCS subsidiary that will focus on building a sovereign data center with a capacity of 1GW. TCS will be keeping the data center business separate with a different management and team outside of TCS. The IT firm said the 1GW capacity will be built over a period of 5-7 years and the cost for every 150MW is $1 billion, implying an overall investment of $6.5 billion, which will be done equally over the next six years. 

The decision places TCS at an interesting crossroad, where it will be deploying significant capital, in high growth but lower RoCE business, than its own, said Nuvama.

"While this might not appear to be the best avenue to deploy capital, view the decision as a balanced one, as it explores growth opportunities in the tech-ecosystem, with manageable capital commitment (for TCS’s balance sheet size) and decent returns profile (though lower than its own)," Nuvama said.

Brokerages largely retained their positive stance on TCS stock, citing undemanding valuations and beat on Q2 results, even as they see FY26 guidance a bit 'fuzzy'. For now, the are not incorporating the data center foray or related capex in their valuations.   

Nirmal Bang Institutional Equities noted that the AI data center capex will be a combination of equity and debt and TCS is looking for partners to finance this. All the data and computing will be hosted in India itself and it will look to sell this service to pure play AI providers, deep technology companies, and hyperscalers. The operating model will be based on co-location basis.

MOFSL said ROE at the subsidiary level will be lower than TCS’s over 50 per cent group ROE, given the capital-intensive nature. But the management guided that at the consolidated level, it will not be margin-dilutive, as external partners will share funding.

MOFSL said the move could be is best viewed as cash deployment rather than a services-led growth driver. The move underlines TCS’s intent to expand in the AI infrastructure layer. Still, integration with its mainstream IT services remains unclear, it said.

"We await clarity on the capital structure, schedule of capex, and other details such as potential rentals and signed MOUs. At present, we do not model data center investments or related revenue into our forecasts," MOFSL said.