TCS’s outlook lends comfort, but a risk clouds FY26 revenue prospects

Unsurprisingly, TCS’s shares surged over 5% on the National Stock Exchange in early trading on Friday.

According to the management, demand recovery is attributed to easing inflation, the US Federal Reserve’s rate cut, and diminishing political uncertainties. Coupled with a robust order book, this is expected to sustain revenue growth momentum. 

Total contract value (TCV) of deal wins stood at $10.2 billion in Q3FY25, reflecting a 26% year-on-year increase, achieved without the boost from mega deals. This suggests a resurgence in smaller-sized contracts, with the return of short-duration deals often serving as an early indicator of a revival in discretionary IT demand. TCS’s book-to-bill ratio stood at 1.35x.

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However, while the TCS management anticipates 2025 to be better than 2024, concerns about the company’s revenue growth outlook persist.

The Bharat Sanchar Nigam Ltd (BSNL) project is 70% over and its revenue contribution is likely to taper off in the next two-three quarters. TCS plans to backfill BSNL revenues, with growth next year expected to be driven by developed markets. But for now, revenue growth visibility for FY26 is hazy.

“We expect the BSNL deal to ramp down sharply after Q4FY25. The deal will contribute a 3.2% revenue growth in FY2025E, but will be a 3.6% growth headwind in FY2026E,” Kotak Institutional Equities said in a report dated 10 January.

The brokerage house has cautioned that TCS does not have enough deals yet to absorb the revenue loss estimated in FY26. “Overall, revenue growth in FY26 will look weak optically at 2.9% due to a 360 basis points headwind from BSNL,” added the report. On the positive side, the lower-margin BSNL project is seen as a margin tailwind in FY26.

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As for Q3FY25 results, expectations were muted, as the quarter was seasonally weak, impacted by furloughs and fewer working days. TCS’s constant currency revenue growth was flat sequentially, and marginally below the consensus estimate of 0.4%. Key markets, including the US and Europe, reported subdued sequential revenue growth. In contrast, India and the MEA regions maintained strong momentum.

The management expects pain in the manufacturing vertical to bottom out in Q4, but the life sciences and healthcare vertical is expected to remain soft and an uptick in demand is expected once clarity emerges on the government policy in the US.

Earnings before interest and tax (Ebit) margin was in-line with expectations at 24.5%, up 40 basis points sequentially led by increase in utilization levels and cost control that offset headwinds from adverse portfolio mix and furloughs. The management continues to target a medium-term margin of 26–28%.

Meanwhile, in FY25 so far, the TCS stock has gained 8%, significantly underperforming the 26% surge in the Nifty IT index, due to weak TCV growth (below $9 billion) in recent quarters.

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Emkay Global Financial Services has trimmed its earnings per share estimate by 1-3%, factoring-in the Q3 miss and higher dividend payout. The brokerage house feels that the stock lacks a near-term trigger. TCS shares trade at FY26 price-to-earnings multiple of around 27 times, according to Bloomberg data. Though valuations have moderated, they don’t appear attractive yet as expectations of low single-digit organic revenue growth for FY25 and FY26 could weigh on investor confidence.