Whalesbook
TCS Reports Strong Q4 Performance
TCS delivered a strong Q4 FY26, with revenue increasing 1.5% in reported currency and 1.2% in Constant Currency (CC) from the previous quarter. Growth was seen across key regions like the U.S., UK, Europe, and India. While the banking, financial services, and insurance (BFSI) and communication/media sectors showed mild softness, the Energy, Resources & Utility sector performed well. Operating margin stayed strong, improving by 10 basis points.
However, for the full fiscal year 2026, revenues declined 0.5% reported and 2.4% in CC. This was partly due to the completion of the BSNL contract, which affected India revenue, although international revenue grew by 2.4%.
Mega Deals Boost Order Bookings
A significant highlight was the strong Q4 order bookings, boosted by three large deals with Marks & Spencer, a UK telecom firm, and a U.S. pharmacy retailer. Combined with five other large deals won during the year, these secure strong visibility for fiscal year 2027 revenue.
The company's client base is also expanding, with new clients across various spending levels, suggesting robust future engagement.
Investing Heavily in AI Capabilities
TCS is focusing on an AI-first strategy, making significant investments in its capabilities. Annual AI revenue has reached $2.3 billion, making up 7.6% of total revenue. The company launched HyperVault, a dedicated AI data center subsidiary, and has trained 46% of its workforce (270,000 employees) in AI and machine learning skills.
Margins Hold Steady Despite Spending
The company reported a 25% operating margin for FY25, up 70 basis points year-on-year, despite substantial AI investments. This strong performance was supported by favorable currency movements (190 bps) and optimization of its workforce structure (80 bps), partially offset by investments in talent and partnerships.
However, a wage revision starting April 2026 is expected to reduce Q1 margins by an estimated 150–200 basis points, a factor management has factored into its guidance.
Attractive Valuation and Stable Outlook
TCS's valuation now looks more attractive, especially after its recent underperformance compared to the Nifty and IT index. The stock price correction seems to have already accounted for challenges from technology changes. Combined with a dividend yield above 4%, the potential for further stock drops appears limited.
While TCS may not be the choice for investors seeking rapid growth during this period of change, its outlook is stable. Key risks to watch for include a sharp cut in global IT spending due to economic slowdowns or significant disruption from rapid AI advancements.