Prabhudas Lilladher has reaffirmed its BUY rating on Tata Consultancy Services (TCS), setting a target price of Rs 3,800. TCS’s Q2FY26 performance has defied expectations, leveraging broad-based sectoral growth, margin expansion, and an assertive pivot towards artificial intelligence (AI). Not only did the company surpass earnings forecasts, but it also signaled robust capital expenditure plans with a multi-billion-dollar AI data infrastructure initiative. Despite volatile deal activity and sectoral headwinds in discretionary spending, TCS remains poised for resilience, driven by digital transformation mandates, cost optimization, and the promise of steady annuity revenue streams from upcoming data center ventures.

Earnings Beat: Resilient Recovery and Margin Expansion

TCS has registered a commendable recovery in Q2FY26, with constant currency (CC) revenue climbing 0.8% sequentially, outperforming consensus expectations. Margins saw a sequential expansion of 70 basis points, taking the EBIT margin to 25.2%. This was underpinned by operational efficiencies, pyramid restructuring, and favorable currency movement, only partially offset by wage hikes. Management has articulated a renewed focus on scaling margins back to the 26–28% range by leveraging cost controls and digital acceleration.

AI Pivot and Capital Expenditure – Building the Future

A signature highlight is TCS’s ambitious plan to construct a 1 GW AI data center in India over the next 5–7 years, with an estimated Capex of USD 6–7 billion. This initiative aims to position TCS at the forefront of the AI infrastructure revolution, catering to hyperscalers, deep-tech firms, and government enterprises. The phased rollout, promising incremental annuity-like revenue, is aligned with management’s prediction of a 10x surge in Indian data center demand over the next decade—a testament to visionary leadership and bold capital allocation.

Deal Wins and Competitive Landscape

In the quarter, TCS secured USD 10 billion in total contract value (TCV), including a substantial USD 0.6 billion mega deal. While deal wins dipped in BFSI (-38% QoQ), Retail, and North America, overall TCV remained above the comfort range, reinforcing the resilience of TCS’s pipeline. Strategic acquisitions, including ListEngage to bolster Salesforce and AI capabilities, signal agile maneuvering in a competitive environment crowded with global peers.

Financial Performance and Stock Levels

TCS has maintained healthy revenue and profitability metrics, with the following key financials for FY25–FY28E:

For investors, the recommended BUY level is at the current market price of Rs 3,062, with a target of Rs 3,800 on a 12-month horizon. The stock trades at 18.6x FY27E earnings, relatively attractive for a bellwether with robust earnings CAGR projected at 9.4% through FY28E.

Strategic Outlook: AI, Digital, and Operational Strengths

TCS’s five-pillar AI roadmap covers: - Internal transformation via AI-led operations and upskilling - Redesign of service delivery into Human + AI models - Talent engine fostered by AI learning copilots (160,000+ AI-trained employees) - Faster client scaling via AI Labs and Innovation Days - Broadening the ecosystem through AI infrastructure and strategic M&A
This multipronged strategy is expected to reinforce TCS’s competitiveness and deepen client engagements, even as discretionary spending remains tepid and digital transformation projects take precedence.

Segment and Regional Performance: Leadership and Challenges

- **Geographic and Sectoral Spread:** Growth was broad-based, though the UK and Retail segments underperformed, posting sequential declines. India and Middle East/Africa saw outsized growth of 4% and 5.9% respectively, with Life Sciences (+3.4%), Tech (+1.8%), Manufacturing (+1.6%), and BFSI (+1.1%) leading vertical growth. - **Deal Pipeline:** The mix of cost optimization and transformation deals keeps the company’s orderbook buoyant.

Employment and Restructuring Initiatives

While TCS implemented wage hikes for 80% of its workforce in September, it also continued a prudent restructuring program—completing half of the targeted 2% headcount reduction, exploring redeployments, and further trimming to protect margins.

Investment Risks and Considerations

- **Pressure from Wage Hikes and Capex:** Margin expansion may be periodically blunted by wage increases and upfront investments in AI and data center capabilities. - **Cautious Discretionary Spending:** While global digital demand is strong, the hesitance in discretionary IT budgets could temper near-term growth. - **Foreign Exchange Volatility:** Currency movements can create both headwinds and tailwinds for reported results.

Anderson Cooper’s Closing Take

In sum, TCS stands out as a model of operational resilience, digital leadership, and forward-thinking capital deployment amidst turbulent global tech markets. Prabhudas Lilladher’s reiteration of the BUY call is grounded in tangible margin improvement, robust deal velocity, exemplary AI vision, and strong capital returns. Investing at current levels, with a target of Rs 3,800, offers exposure not merely to an IT major but to a future-ready digital conglomerate with AI at its core.