Brokerage Prabhudas Lilladher has maintained a 'Buy' rating on Tata Consultancy Services (TCS), setting a target price of Rs 2,390 following the company's second-quarter results. While TCS reported a 15% year-on-year profit growth and strong AI-led revenue, investors should watch for potential margin pressure stemming from strategic investments and the integration of the MHP business.
Prabhudas Lilladher has maintained a 'Buy' rating on Tata Consultancy Services (TCS) with a target price of Rs 2,390. This follows the company's second-quarter performance for the 2027 fiscal year, announced on October 8, 2026. While the report highlights areas of growth, it also points to specific challenges regarding profit margins that investors should monitor.
Financial Performance and Growth
TCS reported a net profit of Rs 13,884 crore for the second quarter, marking a 15% increase compared to the same period last year. Revenue for the quarter stood at Rs 73,188 crore, reflecting an 11.22% growth on a year-on-year basis. Despite the topline expansion, the company saw modest constant currency revenue growth of 0.5% quarter-on-quarter. The firm secured total contract value deals worth $9.6 billion, suggesting that while decision-making cycles remain long, the demand for large-scale projects persists.
AI-Led Revenue and Sector Trends
A significant focus of the brokerage report is the scaling of Artificial Intelligence (AI) services. TCS now generates over $3.1 billion in annual revenue from AI-related services, which accounts for approximately 10% of its total income. This shift is seen as a positive step in monetization. Sector-wise, the company observed resilience in key areas, with the Banking, Financial Services, and Insurance (BFSI) segment growing by 2.5%. The Manufacturing and Technology & Services segments also showed positive momentum, both recording 3.1% growth, even as discretionary IT spending by global clients remains under scrutiny.
Margin Pressures and Risks
While the growth outlook remains positive, profitability is facing headwinds. The company's EBIT margin for the second quarter was 24.0%, which missed some expectations. This shortfall is attributed to higher costs associated with building AI infrastructure, forming strategic partnerships, and maintaining a bench of skilled talent.
Looking ahead, analysts expect further margin dilution of approximately 50 basis points. This is largely linked to the integration costs of the MHP business, which is expected to contribute to operations from the fourth quarter of fiscal 2027.
Investor Monitorables
For shareholders, the primary focus will be how TCS balances its growth initiatives with these rising costs. The long-term success of this strategy will depend on whether the increasing revenue from newer digital and AI initiatives can effectively offset the pressure on margins and the slower pace of traditional service segments. Investors may track future updates on the MHP integration and the execution of AI projects to gauge if the company can return to expanding its margins in the upcoming quarters.