Tata Consultancy Services delivered a measured performance in its third quarter, showcasing the company's ability to maintain operational stability amid market uncertainties. The IT services giant reported revenue growth of 0.8% quarter-on-quarter in constant currency terms, reflecting a cautious approach in the current business environment.

Financial Performance Overview

The company's financial metrics for the quarter demonstrate disciplined execution across key parameters:

Margin Management and Strategic Investments

TCS successfully maintained its operating margins at 25.20% during the quarter, demonstrating effective cost management strategies. The company achieved this stability through productivity gains that precisely counterbalanced two significant cost pressures: wage hikes and strategic investments in artificial intelligence capabilities.

The margin performance reflects the organization's disciplined approach to balancing growth investments with operational efficiency. Despite facing headwinds from salary increments and AI-focused expenditure, the company managed to preserve its profitability levels through enhanced productivity measures.

AI as Strategic Focus

IDBI Capital has identified TCS as being at an inflection point, with artificial intelligence emerging as a core engine for the company's future growth trajectory. This strategic positioning in AI technologies represents a significant shift in the company's operational focus, aligning with broader industry trends toward digital transformation and automation.

The brokerage's assessment suggests that TCS's investments in AI capabilities are positioning the company for enhanced competitiveness in the evolving technology services landscape. Following the Q3 results analysis, IDBI Capital has established a target price for the stock, indicating confidence in the company's strategic direction.

Prabhudas Lilladher has reiterated its BUY recommendation on Tata Consultancy Services with a target price of ₹4,040, citing strong quarterly performance and positive outlook for the IT services giant.

Strong Q3 Revenue Performance

TCS delivered impressive revenue growth in Q3, outperforming analyst expectations across key metrics:

The revenue performance was supported by broad-based growth, with international business contributing positively to the overall momentum.

Sectoral Performance and Growth Drivers

The company's performance showed mixed trends across different business segments. The Banking, Financial Services and Insurance (BFS) sector demonstrated steady growth momentum beyond seasonal furloughs and is expected to return to positive growth trajectory from Q4.

However, certain challenges emerged in specific verticals:

• Weakness observed: Retail and Manufacturing sub-segments
• Strong performance: Essential services and non-Automotive sectors
• Compensation factor: AI revenue growth offsetting legacy offering slowdowns

The management expressed confidence in sustaining international revenue growth, backed by improving visibility in North America and continued momentum in key business pockets.

Financial Projections and Margin Outlook

Prabhudas Lilladher has revised its financial estimates upward, reflecting improved margin expectations:

The brokerage expects compensation revisions to be completed, with residual headcount trimming exercises anticipated in Q4. Given the low revenue base in FY26 and steady international business recovery, the firm projects a 5.4% USD revenue CAGR over FY26-28E.

Investment Rationale

The target price of ₹4,040 is based on a 23x multiple applied to FY28E EPS estimates. The positive outlook is supported by the company's strong AI revenue momentum, international business recovery prospects, and margin improvement expectations. The brokerage maintains its BUY rating, emphasizing the company's ability to navigate current market challenges while capitalizing on emerging technology opportunities.