TCS Q2 Concall Highlights: Revenue Per Employee Slips As AI Revenue Crosses $3.1 Billion

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TCS management says that pricing is broadly stable across portfolio.
 

TCS management said that the revenue per employee has seen slight down tick in Q2, while AI revenues are coming at much higher margins.

COO Aarthi Subramanian said, AI revenue has grown across all the segments, while BFSI, manufacturing and life science sees highest traction for AI demand and are leading.

Krithivasan said, BSNL can provide cushion for next couple of quarter. Regional markets continues to be lumpy, while there is volatility in regional market that’s why reported separately.

Chief Operating Officer (COO) Aarthi Subramanian said, "did quite well of AI revenue in Q2, while there are tailwinds on the back of vendor consolidation in traditional services."

Chief Executive Officer (CEO) and Managing Director K. Krithivasan said, Demand is improving in various areas. Consumer business saw a down tick while travel segment stayed resilient  Life sciences segment saw stable demand.

Chief Operating Officer (COO) Aarthi Subramanian said, growing AI revenue shows the shift in client spending, while the company saw a wider adoption of AI and human approach.

TCS management said that the company aims to create new growth areas for future, expanding into data centers and other high growth areas.

For TCS, AI continues to gain momentum as a structural growth driver, with AI revenue crossing the $3.1 billion mark and now accounting for 10% of the company’s overall revenue, according to IT giant's conference call.

Growth across various segments was largely led by the Banking, Financial Services, and Insurance (BFSI) sector, which grew by 2.5% sequentially in constant currency. The Manufacturing sector, along with Technology and Services reported strong quarter-on-quarter constant currency growth of 3.1% each. On a regional basis, the United Kingdom market saw a solid 3.5% sequential growth.

TCS announced a five-year strategic partnership with Porsche AG. As a core part of this agreement, TCS will acquire a 100% stake in MHP, the Germany-based management and IT consulting subsidiary of Porsche. It also reached an agreement to transition Best Buy's Global Capability Center in India over to TCS. 

“This quarter we announced two unique deals with Porsche and Best Buy which represent a new category of transformation partnerships. Together with our clients, we are building repeatable value platforms that will industrialize AI at scale,“ said K Krithivasan, Chief Executive Officer and Managing Director.

TCS' annualized AI revenue has now crossed the $3.1 billion mark. This means AI services now account for more than 10% of the total revenue.

“Demand for delivering business outcomes with AI-native solutions, AI-led transformation of enterprise systems and autonomous GBS, continues to accelerate," stated Aarthi Subramanian, Executive Director and Chief Operating Officer.

Speaking on Q2 numbers, K Krithivasan, CEO & MD of TCS said "pleased with the broad-based growth in international markets & most industry segments."

 “Investments in learning and critical skills drove a 17% sequential increase in learning hours to 17.1 million. This quarter our employee base reached over 598,000, while attrition remained stable at 13.3%," said Sudeep Kunnumal, Chief HR Officer.
 

• CC revenue growth at 0.5% QoQ
• International revenue grew 1.2% QoQ in CC terms
• BFSI revenue grew 2.5% QoQ in CC terms
• Manufacturing revenue grew 3.1% QoQ in CC terms
• Technology & Services revenue grew 3.1% QoQ in CC terms
• Annualised AI revenue at $3.1 billion, crossing 10% of revenue
• Q2 total contract value (TCV) at $9.6 billion

TCS declared a second interim dividend of Rs 12, along with its financial results for the second quarter of FY27. The record date for the dividend is Oct. 14.

Results Vs Estimates

• Net profit at Rs 13,884 crore vs estimate of Rs 13,788 crore
• Revenue at Rs 73,188 crore vs estimate of Rs 73,026 crore
• EBIT at Rs 17,553 crore vs estimate of Rs 17,805 crore
• EBIT margin at 24% vs estimate of 24.38%

TCS Q2 Results - Cons, QoQ

• Net profit up 4% at Rs 13,884 crore vs Rs 13,349 crore QoQ
• Revenue up 1.3% at Rs 73,188 crore vs Rs 72,275 crore QoQ
• EBIT up 1.4% at Rs 17,553 crore vs Rs 17,317 crore QoQ
• EBIT margin at 24% vs 24.38% QoQ

TCS announced second quarter results with net profit rising to Rs 13,884 crore.

After bucking the bearish trend for most of the day, the stock slipped to red and ended 0.21% lower 2,076 apiece, while the benchmark Nifty 50 closed 1.64% down.

According to Bloomberg estimates, revenue is estimated  rise 1.2% quarter-on-quarter to Rs 73,152 crore from Rs 72,275 crore, while EBIT is projected to increase 2.8% to Rs 17,802 crore from Rs 17,317 crore. EBIT margin is expected to expand to 24.33% from 24% in the previous quarter. The net profit is estimated to rise 3.3% to Rs 13,794 crore, compared with Rs 13,349 crore in Q1.

JP Morgan

• Expect organic TCS CC QQ revenue growth to be 0.4%.

• Do not think the business model is broken and expect it to benefit from an eventual turn in the business cycle.
• TCS is trading at -2SD on 5/10 yr P/E bands with low expectations going into earnings. 
• Key downside risk include Rupee appreciation vs the FX basket, lower-than-expected revenue growth, decrease in tech spends, and weak economic activity in the US.

CLSA

• Macro is similar as in the previous quarter. TCS Is seeing positive momentum.

• Win ratios have not deteriorated for TCS. Orderbook should be in US$7bn-US$9bn range excluding mega deals.
• BFSI  continues to lead growth, along with the tech services vertical.
• Believe that the services industry market size has shrunk leading to no meaningful growth for TCS.
• TCS are not seeing any incremental deflation due to AI.

ICICI Securities

• Estimate revenue growth of 0.6% QoQ CC in Q2FY27, led by healthy deal ramp up in Jul'26/Aug'26, part

• TCS  is seeing recovery in its manufacturing vertical, but softness in retail and CMT continues. 
• Expect EBIT margins to increase slightly by 10bps QoQ, despite impact of wage hike. 
• Expect Q2FY27 deal TCV to be in line with previous four quarter average TCV run-rate of approximately $10bn.

HSBC

• 2Q27 sales growth for TCS is expected to be 0.6% q-o-q in USD terms and 0.8% q-o-q in organic CC terms
• Expect the operating margin to improve q-o-q by c35bp on account of favourable currency movement and part absorption of wage hikes taken in Q1.

In the June quarter, TCS' consolidated net profit fell 2.7% Q-o-Q to Rs 13,349 crore, compared with Rs 13,718 crore in the March quarter.

Revenue from operations, however, increased 2.2% sequentially to Rs 72,275 crore, from Rs 70,698 crore in Q4 FY26.

The pressure was more pronounced at the operating level. EBIT declined 3.1% Q-o-Q to Rs 17,317 crore, while EBIT margin contracted 130 bps to 24%, compared with 25.3% in the previous quarter.

TCS maintained a workforce of nearly 5.94 lakh employees, while attrition increased during the quarter.

The Q1 numbers highlighted the challenge facing TCS i.e. revenue was still growing, but profitability came under pressure. Q2 will therefore be closely watched for signs that margins are stabilising alongside a recovery in demand.

Post announcement of the financial results for the quarter ended Sept. 30, the company will host an earnings call with analysts/investors on the same day at 7:00 p.m. (IST). During the earnings call, the leadership team will discuss financial performance and take questions.

For investors, the headline revenue and profit numbers may only tell part of the story. The key question will be whether TCS sees enough improvement in client spending and decision-making to support a stronger second half of FY27.

Brokerages will be watching commentary on BFSI demand, developed markets, discretionary spending, large deals, AI-led revenue opportunities, pricing pressure, margins and data-centre investments.

HDFC Securities also expects management commentary on furlough intensity, CY27 client budgets, AI's deflationary impact and large-deal conversion to be closely monitored.

For TCS, the earnings question is therefore becoming increasingly clear i.e. Can new AI-led opportunities and large deals finally overcome weak discretionary spending, or will global demand continue to keep growth in check? That answer could be more important for the stock than the Q2 headline numbers themselves.

Citi

• Expect revenue growth of ~0.7% qoq in cc terms.
• Margins likely to improve marginally qoq - limited operating leverage given slow growth.
• Expect deal TCV to be in the range of approx $9-10b.
• Key things to watch - demand outlook, margin trajectory, deal TCV and views on BFSI & Retail verticals.

Jefferies

• Expect QoQcc revenue growth to improve slightly in 2Q to 0.6% QoQcc led by UK and Europe and India regions. 
• Expect margins to be largely steady as any excess profits are likely to be reinvested in the business. 
• Deal wins are likely to be steady in the US$9-10bn range. Demand outlook especially  in BFSI vertical, North America and European region.
• Second Phase of BSNL deal and impact of AI on growth and execution at TCS amid boardroom uncertainty at Tata Sons will be key areas to watch. 

Amid a broad-based market selloff, TCS emerged as the standout performer and the top gainer on the Nifty ahead of its Q2 results, helping the Nifty IT index remain the only sectoral gainer in an otherwise weak session.

The shares traded 1.38% higher as of 1:35 p.m. 

Shares of Tata Consultancy Services Ltd. traded 1% higher ahead of the company's second-quarter result. 

This is likely to be one of the biggest questions for TCS during the earnings call.

AI is creating new opportunities for Indian IT companies, but it is also putting pressure on pricing as productivity gains are increasingly being passed on to clients.

HDFC Securities expects the IT sector to face around 6-7% deflationary impact from AI, although this is being partly offset by new AI-centric deal wins.

The challenge is that conversion of these opportunities into meaningful revenue remains slow.

For TCS, investors will therefore be looking beyond the headline revenue number for commentary on AI revenue traction, scalability of AI-led deals, pricing, large-deal conversion and client spending.

The company's data-centre investments will also remain on the radar as demand for AI infrastructure continues to develop.

Bloomberg estimates suggest revenue rise 1.2% quarter-on-quarter to Rs 73,152 crore from Rs 72,275 crore, while EBIT is projected to increase 2.8% to Rs 17,802 crore from Rs 17,317 crore. EBIT margin is expected to expand to 24.33% from 24% in the previous quarter. The net profit is estimated to rise 3.3% to Rs 13,794 crore, compared with Rs 13,349 crore in Q1.

Deal TCV could arguably be more important than the quarterly revenue number. TCS reported $9.5 billion of total contract value in Q1, and most brokerages expect Q2 TCV to remain around $9-10 billion, with some estimates extending towards $10-11 billion. Citi expects TCV of around $9-10 billion, while Systematix and ICICI Securities expect a similar range. Jefferies also sees deal wins remaining steady at $9-10 billion.

The focus, however, will be on whether these wins are translating into revenue growth. Healthy TCV without faster ramp-ups could indicate that clients continue to delay technology spending despite signing large contracts.

Revenue Growth And Demand Recovery

TCS is expected to report a 1.2% quarter-on-quarter increase in revenue to Rs 73,152 crore from Rs 72,275 crore in Q1, according to Bloomberg estimates. Net profit is projected to rise 3.3% to Rs 13,794 crore, while EBIT is expected to increase 2.8% to Rs 17,802 crore.

In constant-currency terms, brokerages are expecting revenue growth of around 0.4-0.8% sequentially. Jefferies and ICICI Securities expect 0.6% growth, while Citi estimates 0.7% and JPMorgan 0.4%.

The key question will be whether the improvement is broad-based or largely driven by a few pockets. BFSI is expected to remain a key growth engine, while manufacturing could show signs of recovery. Retail and communications, media and technology are expected to remain relatively softer.

Margins After Q1 Wage Hikes

Margins will be another major focus. TCS reported a 24% operating margin in Q1 after absorbing the impact of wage hikes, and Bloomberg expects EBIT margin to improve to 24.33% in Q2.

Most brokerages see either stable or modestly higher margins. ICICI Securities and Systematix expect a 10-basis-point improvement, while HSBC sees operating margin expanding by around 35 basis points, helped by favourable currency movement and partial absorption of the wage-hike impact. Jefferies, however, expects margins to remain broadly steady, arguing that any excess profits could be reinvested into the business.

AI Impact And The Business Model

Artificial intelligence remains one of the biggest structural questions for the IT services sector. TCS' annualised AI services revenue reached $2.6 billion in Q1 fiscal 2027, up 13.6% sequentially. Investors will want to understand whether AI is creating new revenue pools for TCS or beginning to pressure traditional application development and maintenance work.

CLSA said TCS is not seeing incremental deflation from AI and that win ratios have not deteriorated. The brokerage also believes BFSI and technology services continue to lead growth.

TCS shares opened over 1% higher ahead of its Q2 results today. The shares went on to climb further and traded nearly 3% higher at Rs 2,133.30. 

Tata Consultancy Services (TCS) is set to announce its second-quarter results for FY27 on Thursday, with the IT major coming into the earnings season after a difficult year for technology stocks.

A look at TCS' performance during the September quarter over the last five years shows how sharply the growth environment has changed, from double-digit expansion in the post-pandemic period to muted growth in recent quarters. 

TCS' Q2 performance was particularly strong in fiscal 2023. Revenue rose 8.6% year-on-year in dollar terms and 15.4% in constant currency, while operating margin stood at 24%. Net income was largely flat at $1.3 billion as wage and supply-side pressures weighed on profitability. The company had then described demand as strong across industries and geographies.

Read more here. 

Hello corporate biscuits! This is Khushi, and as the earnings season begins I am back to keep you updated with every detail that matters. 

Grab some coffee, and stay tuned!