India's TCS Jumps 4% on Signs of Demand Revival

Tata Consultancy Services (TCS), India's largest IT services exporter, saw its shares jump by 4% in pre-open trade on Friday, as investors cheered the company's assessment that there are early signs of a demand revival. The upbeat commentary from TCS's CEO, K Krithivasan, overshadowed a weak performance in North American revenue for the fifth straight quarter. The management highlighted early signs of a revival in discretionary demand in the October-December quarter, prompting brokerages to anticipate margin improvements by FY26.

TCS reported its highest third-quarter order book in five years, with a total contract value (TCV) of $10.2 billion. Despite the seasonally weak quarter due to the holiday season in core markets like North America, TCV rose 25.93% year-on-year and 18.6% sequentially. The management attributed its optimism to a shift in deal dynamics, including shorter deal cycles and a better mix of wins, which bolsters confidence in stronger performances for CY25 and FY26 compared to CY24. Additionally, CEO K Krithivasan cited easing interest rates, softer inflation, and reduced political uncertainty post-US presidential elections as factors supporting discretionary demand revival.

Brokerages such as CLSA upgraded the stock to 'outperform' and raised its price target to Rs 4,546, citing improved demand commentary and a sharp uptick in the order book. CLSA also highlighted artificial intelligence (AI) as a growth driver for TCS in the future. Nuvama Institutional Equities echoed this optimism, calling the management's commentary the most positive in two years. The brokerage highlighted strong deal wins and the management's efforts to offset BSNL revenue impacts as key positives. Nuvama retained its 'buy' rating while marginally raising its price target to Rs 5,200.

Jefferies projected a 9% earnings-per-share (EPS) compound annual growth rate (CAGR) for FY25-27, citing potential margin improvements post-BSNL ramp-down. The brokerage maintained its 'buy' rating with a price target of Rs 4,760. However, not all brokerages are equally bullish. Nomura remains cautious about TCS's growth visibility and the challenge of backfilling BSNL revenues in FY26, maintaining a 'neutral' rating with a price target of Rs 4,020. Similarly, HSBC, while acknowledging that TCS’s performance may have bottomed out, highlighted downside risks to FY26 consensus. The firm expressed concerns over the possibility of TCS underperforming its large peers in FY26 due to its higher exposure to Europe and the absence of BSNL revenues, which lifted growth in FY25.

In conclusion, TCS's upbeat outlook and strong deal wins have sparked fresh optimism among brokerages, with many anticipating margin improvements by FY26. The company's shift in deal dynamics and the revival in discretionary demand are seen as positive indicators for future growth. However, some brokerages remain cautious about TCS's growth visibility and the challenges it faces in backfilling BSNL revenues in FY26. As the earnings season begins, investors will closely watch TCS's future outlook and the performance of other IT companies to gauge the overall health of the sector.