TCS Q2 results highlights: TCS’ plan for 1GW data center raises analyst concerns- How will $6 billion investment impact margins?

Axis Direct highlighted key risks to its estimates and target price

*The demand environment is uncertain because of the potential threat of recession from the world’s largest economies.

* The rising subcontracting cost and cross-currency headwinds may impact operating margins negatively.

“We are constructive on the long-term outlook of the company and expect the ongoing gradual recovery to continue further,” it added.

“From a long-term perspective, TCS has developed a resilient business model backed by multiple long-term contracts with leading global brands. The company has also built strong capabilities across domains, positioning it well to capture incremental market share in the evolving digital landscape. However, near-term growth prospects remain constrained by prevailing macroeconomic uncertainties in major economies, which continue to weigh on client spending. Despite this, discretionary IT spending is expected to recover gradually as the adoption of newer technologies accelerates, supporting TCS’s growth trajectory over the medium to long term,” the report by Axis Direct noted.

Incred Equities has trimmed its growth estimates for TCS, saying “a slower recovery in the North America region and the financial services vertical, along with weak bookings and higher project cancellations, remain key downside risks.”

“We now expect FY25–28F US dollar revenue to grow at a CAGR of 2.4%, compared to 4% earlier, and profit after tax (PAT) in rupee terms to grow at 5.8% versus 7.3% earlier. We continue to value TCS at 23x FY28F EPS to arrive at our lower target price of Rs 3,663 (Rs 3,818 earlier),” Incred Equities said.

The analysts added, “Better operating cash flow, a stable dividend payout ratio, and healthy return ratios support our valuation.”

Elara Capital highlighted that TCS posted a 70 basis point (bps) quarter-on-quarter (QoQ) expansion in EBIT margin to 25.2% in Q2, driven by an 80bps benefit from rupee depreciation, a 40bps gain from pyramid rebalancing, and a 20bps improvement from operational efficiency.

It also noted that the EBIT margin was “offset by a 70bps impact from wage hikes effective from September 2025.”

“Management sustains aspirational EBIT margin in the range of 26–28%. H1-B exposure remains minimal, with only 500 associates opting for it,” Elara said.

“The India market was a drag on growth, declining 36.6% YoY on a USD basis; however, it was up 0.6% QoQ in USD terms,” Elara added.

Elara Capital has slightly revised its FY27 estimates, expecting a 3% growth in USD revenue in FY27 after a 0.9% decline in FY26.

“Orderbook is likely to be range-bound. New skills as well as continued high attrition will likely keep cost elevated and margin is likely to be under pressure. The company has undertaken an initiative to chase growth, and we await execution of the same. We cut our TP to Rs 3,600 from Rs 3,770 based on 26x (unchanged) FY28E P/E. We retain Accumulate.”

Nomura said, “The 70 basis point (bp) quarter-on-quarter improvement in EBIT margin mainly came from an 80bp benefit due to currency movements. The impact of salary hikes was balanced out by gains from operational efficiencies.”

TCS mentioned that out of the 3% drop in headcount this quarter, around 1% was due to involuntary attrition (layoffs). “While TCS did not indicate any incremental cost of retrenchment, we believe if there is additional 1% staff restructuring (as they had indicated a total of 2%), it would lead to similar restructuring cost in 2H.” Nomura added.

TCS share price opened in red a day after posting its second quarter results. The stock price opened 0.4 % lower at Rs 3,050. As of now, the stock is changing hands at a price of Rs 3037.50, which is 0.8% lower.

TCS announced to set up a wholly owned subsidiary in India to build multiple AI and sovereign data centers, targeting 1GW capacity over six years with a planned capex of $6–6.5 billion, funded through debt, equity, and external partners.

Nomura expressed caution regarding the financial returns from this venture, observing that “it is unclear to us how the ROEs of this business will be similar to existing business RoE of ~50% given its capex-heavy nature with IRRs at ~20%.” While the initiative could strategically position TCS in the fast-growing AI and cloud infrastructure space, the report suggests that the capital-intensive model may weigh on its traditionally high return ratios.

Revenue in constant currency terms rose 0.8% sequentially, marking a recovery after two consecutive quarters of decline. In the previous quarter, TCS had reported a 3.3% fall in constant currency revenue.

TCS reported a consolidated net profit of Rs 12,075 crore, increased marginally by 1.39% year-on-year basis including one-off restructuring expenses of Rs 1,135 crore. However, excluding the one-off impact, net profit rose 8.36% year-on-year to Rs 12,904 crore. The operating margin expanded by 70 basis points sequentially to 25.2%, while the net margin stood at 19.6%.

TCS reported total expenses of Rs 49,463 crore in the September quarter, higher than Rs 48,118 crore in the previous quarter. Employee benefit expenses remained the biggest cost component at Rs 38,606 crore, reflecting the company’s large workforce and compensation revisions during the period. The IT major posted a total comprehensive income of Rs 12,551 crore for the quarter.

The Banking, Financial Services and Insurance (BFSI) segment remained the largest contributor with Rs 25,717 crore in revenue, followed by the consumer business at Rs 10,351 crore and communication, media and technology at Rs 9,802 crore. Manufacturing revenue stood at Rs 6,631 crore, while life sciences and healthcare brought in Rs 6,884 crore.

TCS said it incurred a one-time restructuring expense of Rs 1,135 crore in the three and six months ended September 30, 2025.

“In July 2025, the Group announced re-structuring initiatives. As a part of this initiative, the Group released / will release certain associates from the organisation whose deployment may not be feasible. Termination benefits have been provided as per policy devised for this purpose. Such termination benefits, due to their size, nature or occurrence are disclosed as “Exceptional item” in the audited consolidated interim financial results,” The company said in its release.

Samir Seksaria, Chief Financial Officer, said, “We achieved good growth momentum across all verticals this quarter. Our disciplined execution helped us expand our margins while making strategic investments. We have prioritized wage hikes, building future-ready capabilities and establishing new ecosystem partnerships. Looking ahead, our financial resilience and robust balance sheet will support both internal transformation initiatives and external investments aligned with our aspiration.”

Aarthi Subramanian, Executive Director – President and Chief Operating Officer, said “We delivered strong growth momentum led by Data, Cloud and AI powered enterprise transformation. Our customer engagements are focused on rapid value realization to deliver speed, efficiency and growth. TCS’ AI Hackathon set a new benchmark – is the largest, most diverse and innovative AI-first culture building initiative. Our new AI and Services Transformation unit will further scale and integrate our efforts.”

– New business entity to build world class AI infrastructure – 1 GW capacity AI datacenter in India

– Acquisition of ListEngage with deep capabilities in Salesforce

– Sustained investments in nurturing AI-first culture and talent – World’s largest ‘Ideate and Build with AI’ Hackathon with 275,000 TCSers

EBIT margins for the quarter expanded by 70 basis points to 25.2% from 24.5% in June. EBIT stood at Rs 16,565 crore.

Operating Margin at 25.2%; an expansion of 70 bps QoQ

K Krithivasan, Chief Executive Officer and Managing Director, said “I am pleased with our strong Q2 performance. I would like to thank all our employees for their dedication and excellence. We are on a journey to become the world’s largest AI-led technology services company. Our journey is anchored in bold transformation across talent, infrastructure, ecosystem partnerships and customer value. The investments including the building of a world-class AI infrastructure business demonstrate our commitment to this transformation.”

* Revenue at Rs 65,799 crore, +2.4% YoY, +3.72% QoQ

* Dividend per share: Rs 11

* Total Contract Value (TCV):$10 billion

* Net Income at Rs 12,904 crore, +8.4% YoY

* Net Margin at 19.6%

The board has declared a second interim dividend of Rs 11 per share. The record date is October 15, 2025 and payment will be made on November 4, 2025.

“We would like to inform you that at the Board Meeting held today, the Directors have declared second interim dividend of Rs 11 per Equity Share of Rs 1 each of the Company.

TCS released its second-quarter earnings report today, posting a consolidated profit of Rs 12,075 crore, up 1.39% year-on-year from Rs 11,909 crore in the same quarter last year. However, the company saw a 5.37% decline on a quarter-on-quarter basis.

Revenue rose 2.4% year-on-year to Rs 65,799 crore from Rs 64,259 crore in Q2FY25.

Anand Rathi expects TCS to report a headcount decline on a sequential basis. The firm says that utilisation as a lever has maxed out for most companies.

However, Anand Rathi expects a headcount increase in september onward. The firm says that the september quarter would usually involve the onboarding of trainees.

In the TCS Q2 results today, the investors will be closely looking at the impact of the Layoffs of 12,000 employees, dependence and impact of the H-1B visa and plans for further de-risking.

Furthermore, investors will also consider the indirect impact on TCS resulting from the Jaguar Land Rover cyberattack. Also, the investors will be looking for the pace of GenAI adoption and the deflationary impact on spending

Equrius Securities says that key things to look for in TCS Q2 results are the demand outlook in BFSI, retail, communication, hi-tech and other key segments.

The firm advises looking for the impact of volatile macro/tariff issues on demand/its clients, the deal pipeline, especially for large/mega-size deals, client decision-making, and pricing trends. This includes the outlook for CY25E/FY26E and beyond, as well as any further updates on growth strategies and dependency on H-1 B visas.

Motilal Oswal Financial Services expects 1 per cent QoQ revenue growth for TCS in Q2 FY26. Further, the firm expects EBIT margin to decline by 20 basis points on a QoQ basis due to wage hikes and lower utilisation.

Motilal Oswal expects TCS’s India business growth to remain flat and about 1 per cent growth in international business.

TCS has deferred its Q2 press conference to observe the death anniversary of the visionary Shri Ratan Tata (1937–2024) — a leader who built trust, compassion, and belief into business.

Meanwhile, Mehta Equities says that the Street expects TCS to post a YoY net profit growth of 3.7 per cent to 9.6 per cent, Rs 12,346 to Rs 13,058 crore

IT sector stocks have also underperformed the broader market in recent months. The Nifty IT index has fallen 7.96% in the past three months.

Nuvama expects the IT sector to clock stable performance in the September quarter (Q2FY26) after a weak start to the year. “Q2FY26E is likely to show signs of stability after Q1FY26 was impacted by tariff-related uncertainty,” it added.

“Almost all companies are expected to grow sequentially this quarter,” Nuvama said, adding that deal wins continue to look steady despite demand volatility.

Read more: IT sector Q2 earnings preview: H-1B fee hike, tariff the big concerns

Kotak Institutional Equities believes that ramp-downs in a few accounts and share losses could lead to moderate growth for TCS. “We forecast moderate revenue growth of 0.2% QoQ. We expect stable EBIT margins; the impact of the wage revision, effective September 1, will be offset by rupee depreciation,” Kotak said.

Kotak noted that the P&L charges from employee separation are not included in their estimates but said “the focus will be on the rationale for the planned separation of 12,000 employees, its impact on employee morale, and the costs associated with the separation,” the report said.

The brokerage expects a total contract value (TCV) of over $10 billion for the quarter, with the company having announced a mega deal during the period.

Read more: TCS Q2 results on October 9; all eyes on H-1B visa impact, rationale of planned layoffs – Kotak sees stable quarter for IT sector

The Indian IT sector is under pressure due to tariff tensions, the H-1B visa fee hike, and the HIRE Act. Kotak Institutional Equities believes India’s IT services industry will post a steadier September quarter (Q2FY26) as demand shows early signs of stabilisation and margins remain firm. “We expect a steadier quarter for IT services, with sequential growth of 0.2–6% across companies.

We believe that rupee depreciation, combined with cost measures, will ensure steady margins. Deal wins will likely be steady to strong, but cost takeout-driven and intensely competitive,” the brokerage said.

Read more: TCS Q2 results on October 9; all eyes on H-1B visa impact, rationale of planned layoffs – Kotak sees stable quarter for IT sector

TCS relies heavily on H-1B visas compared to its peers. The US has announced a $100,000 fee on new H-1B visa petitions. Analysts say tighter H-1B norms may push companies to either increase their dependence on subcontractors or step up local hiring. Although TCS has significantly reduced its reliance on H-1B visas — from 9,166 in 2015 to 5,505 in 2025 — investors will be watching for the company’s plans to further de-risk its operations.

Read more: TCS Q2FY26 preview: Layoffs, employee bench policy & deal wins in spotlight ahead of October 9 results