Tata Consultancy Services reported its Q3 FY26 financial results, revealing a strategic shift in client spending patterns while demonstrating strong momentum in artificial intelligence services. The IT services giant navigated a challenging environment marked by client caution and geopolitical uncertainty, yet maintained robust operational performance and continued investments in future capabilities.

Financial Performance Overview

The company delivered solid financial results for the October-December quarter, maintaining steady performance across key metrics.

Client Spending Patterns Shift to Quarterly Approach

MD and CEO K Krithivasan highlighted a fundamental change in how clients approach technology budgeting. Companies are moving away from fixed annual tech budgets toward quarterly decision-making based on immediate opportunities and return on investment. "Most of our customers are taking a quarterly call based on the opportunities that are in front of them," Krithivasan explained, noting that the traditional model of locking in annual budgets is fading.

This shift reflects broader macroeconomic uncertainty, with clients adopting a more cautious but pragmatic approach to technology investments. Rather than pausing budgets permanently, organizations are evaluating projects based on quick ROI potential versus longer-term initiatives.

AI Revenue Shows Strong Growth Trajectory

Despite representing a small portion of overall revenue, artificial intelligence services demonstrated impressive growth momentum. ED-President and COO Aarthi Subramaniam reported that annualized AI revenue increased from $1.5 billion to $1.8 billion in a short span.

"Every quarter, our incremental revenues on AI is just getting better," Subramaniam noted, emphasizing that clients are increasingly expanding and scaling their AI initiatives after seeing initial value.

Talent Investment and Workforce Development

TCS maintained its commitment to talent acquisition and development despite market uncertainties. CHRO Sudeep Kunnumal reported significant hiring activity and skills development initiatives during the quarter.

Key Workforce Developments:

• Nearly 16,000 new employees hired in Q3
• AI and ML training scaled up threefold
• 217,000 employees currently engaged in deep skilling programs
• Everest Group ranked TCS as industry leader in future skills for AI, ML, and data services
• Approximately 1,800 employees impacted by workforce rationalization exercise

Strategic Acquisitions and Data Center Expansion

The company outlined its acquisition strategy as a key pillar for achieving AI-led services leadership. The recent acquisition of Coastal Cloud, combined with the previous quarter's ListEngage acquisition, positions TCS among the top five Salesforce consulting providers.

CFO Samir Seksaria detailed ambitious data center expansion plans, targeting 1 GW of capacity over five to seven years with anchor customers. The initiative involves a ₹2 billion investment structure with TPG as partner, expecting IRR in the mid-teens to high teens range.

Labour Code Impact and Future Outlook

TCS recorded a one-time expense exceeding ₹2,000 crore related to new Labour Codes that came into effect in November 2021. This provision primarily covers retrospective adjustments for gratuity and leave benefits, with minimal ongoing impact expected.

Looking ahead, Krithivasan acknowledged the challenge of achieving better FY26 international revenue compared to FY25, requiring an "upwards of 3 to 3.5%" growth rate in Q4. The company continues evaluating acquisition opportunities across AI, data, cyber security, enterprise solutions, and digital engineering services to strengthen its new-age capabilities.

The contrasting Q3 results from Tata Consultancy Services and HCL Technologies have intensified debates among brokerages and market strategists about the IT sector's direction, particularly as the industry faces a substantial ₹75,000 crore foreign institutional investor selloff that has made it among 2025's worst-performing sectors.

HCL Tech Delivers Standout Q3 Performance

HCL Technologies emerged as the quarter's clear winner, posting results that exceeded analyst expectations across key metrics. The company's operational excellence was evident in multiple areas of performance.

The company's AI initiatives showed particularly strong momentum, with advanced AI revenue reaching approximately 4% of total revenue. This growth was driven by implementations across Agentic AI, Physical AI, and AI Factory solutions. Management indicated that annual contract value bookings achieved a four-year high, demonstrating robust client engagement.

Emkay retained its Add rating with a target price of ₹1,700, highlighting that HCL Tech has refined its FY26 guidance with overall constant currency revenue growth narrowed to 4-4.5% and services revenue growth increased to 4.75-5.25%. Jefferies expects HCL Tech to deliver the highest recurring EPS compound annual growth among India's top five IT firms over FY26-28.

TCS Encounters Mixed Results Despite AI Progress

TCS presented a more complex picture, with results that met revenue expectations but fell short on margin performance. The company's December quarter revealed both strengths and challenges in the current operating environment.

The company highlighted significant acceleration in AI project implementations, with rapid-builds for AI projects tripling in volume as clients transitioned from experimental phases to scaled deployments. However, TCS noted that productivity gains of 10-15% are increasingly being incorporated into contract renewals, which may limit sharp revenue increases despite growing AI adoption.

Jefferies maintained a Hold rating with a target price of ₹3,485, expressing concerns about limited evidence of meaningful international business growth pickup. The brokerage expects TCS to deliver just 5% recurring EPS CAGR over FY26-28, the lowest among India's top three IT firms.

Brokerage Perspectives and Valuation Concerns

Analyst opinions reflect the nuanced nature of the current IT sector landscape, with valuations and growth prospects drawing mixed assessments.

Systematix adopted a more constructive stance on TCS, raising its target price to ₹3,817 from ₹3,733. The firm noted that at 22x one-year forward earnings, TCS trades at a 12% discount to its 10-year average, potentially offering a favorable entry point. However, Systematix revised FY26 and FY27 EPS estimates downward by 2.8% and 1.5% respectively.

Jefferies pointed out that TCS trades at a 10% premium to Accenture versus a five-year average premium of 5%, raising questions about relative valuation attractiveness. The brokerage emphasized that weak earnings growth outlook may limit upside potential.

Sector Outlook Amid Structural Shifts

The Q3 results underscore the IT sector's position at a critical juncture, where stock-specific execution and demand traction are likely to drive performance rather than broad sector momentum. Brokerages suggest the sector's outlook depends on balancing structural demand shifts with near-term execution challenges.

Key factors shaping the sector include persistent pricing pressures, geopolitical headwinds affecting discretionary spending, and emerging pockets of structural AI demand. The combination of modest growth expectations and client demands for significant productivity improvements creates a complex operating environment for IT services companies.

Elara maintained an Accumulate rating on TCS with a target of ₹3,600, noting that while AI revenues showed higher traction, non-AI revenue remained soft. The brokerage emphasized that growth in both AI and non-AI revenues will be critical for any meaningful recovery in company growth trajectories.