Tata Consultancy Services Limited analyst Q&A

Thank you very much. We'll take our first question from the line of Yogesh Aggarwal from HSBC Securities. Please go ahead.

Hi. Thank you so much. So, Krithi, couple of questions. Firstly, the heightened investments in AI are a very welcome change. My question was, can you provide a little more clarity on the capex required? Because 1 gigawatt seems to be a very, very big investment. I mean global references are almost $20 billion of investment. So, what is the time period? what is the kind of capex? And you said it is sovereign. So, what does it mean in terms of clientele? Would you be selling into your traditional clients or mostly in India? So, a little more clarity would be very helpful.

Yogesh, from a capex perspective, while we have set a target of 1 gigawatt, we will be doing it in phases. We expect to achieve 1 gigawatt over a period of five to seven years. And our calculation roughly is about every 150 -megawatt will require a capex of about $1 billion. It's not that we are going to put all the money in year one. And we also clarified that this would be a combination of equity and debt, and we'll also bring in finance partners for the equity. So maybe if you require more color, Samir can provide on that. The reason that we are saying sovereign cloud is it's going to be established in all centers in India. We are expecting all data and compute to be hosted in India and not leave the shores of India. That's the reason we are saying sovereign data center. Just to provide more information. Our current objective is to provide all passive components. The client whosoever is occupying, they will bring in their compute and storage.

Great. Thank you.

And secondly hoping to sell this to the pure -play AI providers, the deep tech companies and the hyperscalers and to a great extent the government needs in India and the Indian enterprises or the expected participants here.

Thank you. Secondly, on the growth, you said the demand environment hasn't changed and the macro uncertainties are the key reason. While the quarter has been a little bit of a beat, the current growth rates have not been impacted by deflation on S DLC by AI, you think that's not a factor. Is it all macro?

Yogesh, we had better growth compared to Q1. And as I said, macros have not changed much. But our deep engagements with our clients and the AI solutions, the rapid builds that we take to our clients. All of us give us confidence that we will be able to sustain the growth momentum or improve the growth momentum compared to H1. Otherwise, there's no major change in the demand environment.

Thank you. We'll take our next question from the line of Sudheer Guntupalli from Kotak Mahindra AMC. Please go ahead.

Hi Krithi. Thanks for the opportunity. And a follow -up to what Yogesh has asked. So, on this AI data center move, currently, do we have any tie ups with any of the, let's say, large consortium players like a Stargate or any of the deep tech players, either for bringing in more equity investments or for being our tenants once this is set up in the st eady state? And any broad indications on the revenue per megawatt you're looking at and the EBITDA margins and the IRR ’s you are expecting on this data center investment?

Sudheer, in terms of both, one, Krithi talked about finance partners, we are speaking to multiple partners, and we'll finalize in terms of combination, it could be one or more coming in . Also in terms of customers, as we called out, it would be hyperscalers, India enterprises, government, and we look at in terms of overall partnership. In terms of metrics, too early to call out, we have just set up the subsidiary. It would be about 18 to 24 months, when the first revenue starts kicking in at the appropriate time, we'll start calling out the metrics as well.

Fair enough, sir. And just to get to understand the operating model right. Did you say that we will provide it on a cloud service provider basis or a co-location basis or just on a managed services basis?

Okay. It will be on a co -location basis. Okay sir, thank you and all the very best.

Thank you. Next question is from the line of Ankur Rudra from JPMorgan. Please go ahead.

Thank you. I just wanted to understand this AI transformation you're doing. What does it entail in terms of existing client engagements? Do you have a sense of potential productivity gains or any kind of change in scope from a deflation or inflation perspective on your existing services as you transform?

Ankur, this whole our belief and confidence in becoming the largest AI-led services company is based on the strength of the existing client relationships. And the partnerships that we are building with all the players in this ecosystem. And we expect every project that we do will be AI led. So, which means that we'll be offering speed , we'll be offering flexibility and there could be productivity gains also in these projects, but we'll also be doing projects that could not have been done without AI in the past. So, our expectation is overall scope of engagement or size of engagements would definitely increase. But there would be productivity benefits that the clients would get in the individual projects. And we also will get some productivity benefits from doing these projects because we'll be leveraging AI.

I just want to clarify a couple of things. One, was there any headwind on the client this quarter, which had a cybersecurity incident in terms of your revenues and margins? And, the second clarification was if the redundancy charge, we took this time, given 1% was impacted. Should we expect something similar in future quarters also?

No. First on the headwind, Ankur, the only headwind was because of the nature of the outages they had, we could not start some of the projects that we were planning to start, that was the headwind. Otherwise, there was no other significant headwind because we are working very closely with the customer in helping them recover the overall operations. The second question on the charges we had taken as severance. As we explained before, we would be continuing this exercise throughout the year. We are not chasing a particular number here, but we will continue to do this throughout the year. Whenever we are paying any severance, we'll take that charge appropriately in the next two quarters. I cannot quantify what the number would be at this time.

Appreciate it. Thank you and best of luck.

Thank you. Congrats on a very broad-based growth. If I look at the data centre investment, again, what really prompted this? Is this very unlike, I'd say, approach so far of being asset light.

Yes. Ravi, we've been looking at opportunities to expand our play in the overall AI ecosystem. We’ve been working with many of them as solution providers , solution integrators, or leveraging the cloud. Now in the past, if you look at, we also wanted to expand the footprint in India, leveraging the participation we have with all these partners. As you know, some time ago we've also been in private cloud to a limited extent in the past. And then we announced recently the Secure Sovereign Cloud for India requirement. We also announced participation in the Quantum program with the Andhra Pradesh Government. We looked at this as an important adjacency that we should enter. And with that in mind, and to also strengthen our partnership and relationship with the hyperscalers and the deep tech by doing this. All this put together, we thought, and of course, the most important thing is our calculation of unmet demand; that's going to be in the data center space. Our calculation shows that we have only 1.2 gigawatt of capacity in the country. And in the next five to six years, the demand can go up by almost 10 times, whereas the committed capacity is only about 5 to 6 gigawatts. So that is going to leave so much unmet demand. So, with all these things put together, we thought it's a good opportunity for us. And another point is it also guarantees stable annuity revenue as well.

Thanks for a detailed explanation. Second question on the productivity improvements that you're seeing in AI. I got it. So, if I understand correctly, the primary benefit of GenAI is the application development from scratch, right? And that's a relatively actually a small part of the overall market that we play in because what we do is primarily IT outsourcing, which is application maintenance and infrastructure maintenance, things like that, right? So would that be right that those activities we already have Level 1 support more or less automated. So on the existing book of business, how should we think about the impact of AI?

Ravi, when you look at the existing book of business, when you look at our application support services or our infra services, they are increasingly becoming AI led. When you look at how we deliver these services, we see significant opportunities to drive productivity benefits and drive the quality of the service delivery with AI. So that's where the imagination is happening. And the initial productivity savings are starting to be seen, and as we increase the level of autonomy as we understand these technologies better, we should be looking at further productivity benefits. Then the second portfolio, which is significantly, again, aided by AI, is our software engineering life cycle. Again, starting to see good benefits coming in, but then there is an evolution, right? You start with single digits, 10% to 15% productivity, then there's an evolution to reach 20%-25%, but that's a journey to achieve a higher level of autonomy, and that's what we are driving. The third area where we are seeing significant, I would say, opportunity is around AI -powered modernization. As you would appreciate, many of our customers globally have a lot of technology debt that they have carried over the years. GenAI and Agentic AI are powerful tools to really address the tech debt. You can use these AI, GenAI to understand the legacy co de and forward engineer and deliver the new code. So, modernization with AI is a huge opportunity, and we are seeing significant upt ick across customers, but I would say right now significantly in BFSI. And we expect to replicate this across other verticals.

And if I recall right, you already announced a North American bank that's doing a complete mainframe organization using AI right now?

Yes.

Thank you. We'll take our next question from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.

My first question is about the investment in the new subsidiary on data center. Should we look at this investment as a standalone new business you need for providing co-location services or should we think about having a very thick synergy with your existing portfolio of services using this asset intensive business to build some services on top of it?

The business itself, we'll be keeping it separate. It will have separate management bandwidth. We are i n the process of putting in an entirely separate team outside of TCS for this, but it will have adjacencies with TCS. It's a natural extension in terms of what partnerships we are looking at creating with hyperscalers, what services we want to provide to our customers, and this nicely fits in as an adjacency.

And if I may just add to what Samir said, Gaurav, if you look at the entire AI stack, starting from infrastructure as the starting layer, all the way up to the apps and the agentic apps at the most layer, this gives us the coverage across the AI technology stack.

My second question is the interplay between humans and AI that you talked about. How is it going to change the delivery model and the billing models? Do you think that will incrementally move away from effort -based business models to outcome -based business models? Is that how the business should evolve, and there should be more nonlinearity in the business going forward?

I think that is the direction in which the model is going to evolve. These are initial days, but we are starting to make commitments on outcome-based projects with the select customers. And there are learnings, and this is a model that we see increasingly evolving and becoming more mainstream with customers.

My last question is whether we should evaluate, or should we consider this new adjacency as a completely different business with respect to the return ratio profile given that right now, we are very asset -light business and having a very different return ratio profile. Just trying to understand how we should think from a medium-term perspective of the company?

As we said, this is an investment which will have partners coming in. From a profitability perspective, I don't think at an overall TCS level, it will not be margin dilutive. Return ratios, also given the overall size expected over the years , should not have a significant impact. Our ROEs are currently over 50%. So, we still expect it to be benchmarked.

Okay. Thank you so much.

Thank you. The next question from the line of Surendra Goyal from Citi. Please go ahead.

In your prepared remarks, you said that FY '26 growth in international business will be better than FY '25. So just wanted to clarify if this is in constant currency terms, USD terms? And could you also tell us what the comparable growth in FY '25 was?

It was about 70 basis points, and it is in constant currency terms.

So constant currency basis, 70 basis points and this year will be better than 70 basis points. Understood. The second question is with the release of 1% of the workforce; the headcount declined by 20,000 people, or 3%. And then what you had announced earlier was 2%. So, should we expect a similar kind of head count reduction in the next quarter as well?

The 20,000 net head count decline is a factor of voluntary and involuntary attrition. So, you should consider all of that. But as we announced again the 2 percent, we are midway, so we have done approximately 1 percent of it. And like what Krithi just mentioned, we don't have a target. We are not chasing a target. We'll continue to evaluate everyone after all the investment in learning and development that we've done, where we find certain mid and senior level people are not able to find the right role based on their seniority. Those are the ones that we will release with a lot of care.

So just to clarify, there will be no involuntary attrition beyond the 1% number. Is that understanding, correct?

No, I didn't say that. We estimate it to be approximately 2%. We are currently at 1%, and we will continue to evaluate people whom we can redeploy. The ones we are not able to re-deploy; those are the people that we will release.

One last question, Krithi, Aarthi, I think , in terms of the data center business, I think there are a lot of businesses which are synergistic to AI if we take such a broad view of things. So, is there clarity in terms of that, okay, what other areas could we possibly invest in?

We've been evaluating multiple opportunities. As I said, this one looked more attractive to us based on the discussion that we've been having with the potential buyers, the demand commitment we could get , the kind of revenue profile, the committed annuity revenue profile it has and the potential unmet demand we'll have in India, all combined look most attractive for us to start with. But we'll continue to explore if there are other adjacencies that come up, we'll explore.

And Samir, just one clarification on ROE of this new business. What is the expected ROE versus your current ROE of 50% plus, as you highlighted earlier?

The ROE of this new business, as you all rightly identified, that's capital-intensive and will be low. What I'm saying is, overall TCS ROE will remain market benchmarked.

Understood. Thank you.

Thank you. W e'll take our next question from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Hi, thank you for taking my question. My first question was for clarification. So, the statement which you made is that TCS intends to become the world's largest AI-led technology services company. How are you defining that as the largest AI-led technology company, which metrics you are targeting at?

Kumar, based on the discussions that we've been having with customers, and Aarthi talked about the internal training we did, Hackathon we did, and the number of participations. So, we believe that in multiple metrics , in terms of the number of people participating, the number of projects we'll be doing. All combined definitely, we aspire to become the largest. If you ask me for one single metric today, I don't have it , to be honest. We will be evolving. How do we measure ourselves on a year-on-year growth and improve on this, so that's the honest answer. But we are confident that we'll be able to have the biggest impact that we'll deliver in the industry because of leveraging AI.

Got it. Thank you for that. My second question was on margins. So, we have seen sequential improvement now the wage hike is behind you, and pyramid rationalization also will start kicking in and going by your comment, your second half growth should be better than first half. So, for the rest of the year, is it fair to expect the margin should continue to see an expansion?

Kumar, as you know, in H1, we have improved 100 basis points. We will continue our journey towards our aspirational band of getting closer to 26%. But the puts and takes on it have been in terms of the implications which you called out. The wage hike was in Q2 for 1 month; it will be for the full quarter next quarter. Also, in terms of the investments which we have called out would have an impact we have been investing, and this would have increased investment requirements. Irrespective of it, we would want to inch closer to 26%.

Great. Thanks a lot for that.

Thank you. N ext question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Good evening. Thank you for the opportunity. J ust a couple of questions. So, one is in the last quarter on the deal, well we have had very good deals on a consistent basis. You had alluded to three points that were not leading to better revenue conversion. One of them being projects starting at a lower pace and the other one being some projects being paused. How is that sort of evolving at the moment?

Nitin, at that point like we probably as I was alluding to, I would say, much improved situation. The number of deferrals or projects getting paused has been reduced compared to last quarter.

Sure. So incrementally, we should see better accretion. At least growth should be in the positive territory here on and you have alluded to that?

That is our hope.

Correct. Any incremental update on, let's say, BFSI or consumer business and Europe, I think last quarter you were a little tepid from a commentary on those three . So jus t wanted to have thoughts there?

See, if you look at the growth momentum, all of them have improved. BFSI continues to grow globally, particularly BFSI North America has done well. And similarly, if you look at Europe, it has done well compared to last quarter. And then even if you take C onsumer Business, the degrowth has been largely arrested. And so overall we expect most of the industry segments to bend the curve subject to seasonality of Q3, but they'll be getting into growth momentum. Of course, the Q3 seasonality would be in play.

On the data center capex, maybe roughly based on what you said, it's maybe around $6.5 billion over a 7-year period. From a cadence perspective, how should we think about it with the early part of the 7 years versus the later part? So would the capex be partially by partners and partially by us. Just clarification on both?

Yes, definitely, it will be partially by partners, partly by us. And at this time we told you it's about 5 to 7 years for the complete build-out of 1 gigawatt. Currently, we expect it will be more uniform, but if there is an increased demand, if we have to accelerate, we will definitely calibrate it at that time, but current planning is that it will be phased out uniformly over the 6 years.

And just one last one if I may. Any color on the kind of deals in terms of sizing? Are you seeing a return of smaller deals or discretionary, any improvements there that you have seen during the quarter or directionally?

No significant improvement, but at the same time, when Aarthi spoke, she was mentioning about the number of rapid build projects that we are doing. They are smaller in nature, smaller tenure which we tend to complete them within a quarter. Such projects are increasing in number and we also find more modernization projects. Some of them tend to be shorter. While a large mainframe modernization will take a long time, some of the other modernizations can also be completed in a short time. So, such projects are increasing. But overall, if you ask me, is the number of short -term projects increasing compared to larger projects. There is no significant change.

Perfect. Thank you so much, Krithi and all the very best.

Thank you.

Thank you. N ext question is from the line of Abhishek Kumar from JM Financial. Please go ahead.

Hi, good evening. T wo quick questions about the cybersecurity instance, just wanted to check if the issue has now been resolved and the projects you said which couldn't start, have they now started resuming?

Yes, I think the recovery process has been completed. And all the sales and manufacturing systems are all up , and this happened early this week. So, I think we expect the projects to pick -up in the coming weeks.

Great. That's good to hear. Second, near term especially 3Q, any early indication of how furloughs are looking this year compared to previous years. Generally, we have seen that in a weak demand environment furloughs tend to be longer. Any such signs at this stage?

At this time, we are planning based on the inputs we have, it's likely to be similar to last year.

Okay. Sure. Thank you and all the best.

Thank you. N ext question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

Thanks for taking my question. So Krithi, just once again, on the AI data center investment. Given that you mentioned that it's going to be more like a sovereign data center and given the GDPR regulations across the world, is it fair to say that this will have limited synergies with our existing clients and most of the clients that we would be deploying in this data center will be more of India based and that is where we would be looking for any synergies if at all from our current sector?

It's a passive data center. The likely users could be the hyperscalers, deep tech who want to do the training, inferencing in India or Indian enterprises, they want to leverage it as a private cloud. We are not expecting our overseas customers to be hosted, specifically in India. It's more like what we are offering for these hyperscalers and India-based businesses or deep tech.

And you mentioned that we've basically gone ahead with this, as for the demand commitments and the annuity commitments. I would assume we would already have conversations with.

I did not say demand commitment. I'm saying that there is a lot of unmet demand in the marke t that led us to g etting into this business.

So, are there any MoUs that we have signed or any early connections that we have got into potential clients?

We are having quite a few conversations with our customers, to explore the demand, and we are quite positive about the prospects.

One last question from my side. In terms of the revenue this quarter, we saw a sharp jump in the sale of equipment and software licenses revenue. Almost more than half of the incremental revenue in this quarter came from that . Is it just a quarterly specific thing? Or do you think there could be a trend going forward as well?

The increase of the equipment and software expenses this quarter has been about ₹250 crores. BSNL this quarter has remained flat.

I mean it's expected to remain in the same range as it has been?

We have Q3 seasonality, which you'd typically see. Other than that, we don’t expect to see any material change, unless we get the BSNL PO later.

Thank you so much for taking my question. I wish you all the best.

Thank you. We'll take our next question from the line of Rishi Jhunjhunwala from IIFL. Please go ahead.

Yes, thanks for the opportunity. So, just harping a little bit more on that AI investment, a couple of reasons that you provide was that the demand in this space is very high and provides a new stream of annuity revenues. But outside of that, does it put us in any kind of disadvantage versus our peers, if we are not doing this investment or does it put us at an advantage versus other peers on the global revenues that we earn here? If that is not the case, then I mean if you look at the overall technology spending landscape, then there would be a lot of pockets around software and solutions, where those kinds of investments probably would have been more synergistic to us.

Rishi, there are definitely a number of places where we can invest. We took this place because it creates a synergy with our existing relation with hyperscalers, who also happen to be our large clients as well, large GTM partners as well. And we also have deep relationships with all the AI native companies, who could potentially be using it for their India requirement. So, we believe that there will be a natural synergy that will be created. As I said, we want to play in this ecosystem strongly.

And, it gives another group synergy as well. If you look at the Tata Group companies are in the power, real estate, project management business.

Tata Communication

Tata Communication. So there is a different kind of synergy we can build in here. But from a client perspective, we believe the strong collaboration can be derived of this one.

And the Tata Group synergy, we see this as a very unique Tata advantage.

Understood. And the second question is, I think in the opening remarks, you hinted that wh ile we have done this one acquisition, there seems to be some focus around trying do more acquisitions as well. I guess this is something we've done after almost 10 years, so should we assume that our acquisition intensity may also potentially go up in the co ming years? And how does that change our capital payout policy, if at all?

Yes. We are very actively looking at more opportunities for acquisitions. And capital payout policy, currently; the stated policy continues to be to return 80% to 100%.

Of substantial free cash flows and that is after all investments.

But so, but if we end up making a huge acquisition that impact our ability to do a cash flow, we will be upfront about it.

Understood. All right, thank you sir.

Ladies and gentlemen, we'll take that as a last question for today. I now hand the conference over to management for closing comments. Over to you.

Thank you, operator. • In Q2 FY26, our Revenue grew 0.8% sequentially in constant currency, with an operating margin of 25.2% and a net margin of 19.6%. We saw good growth momentum across most verticals, service lines and geographies this quarter. • International business fuelled growth, along with India and emerging markets performing well. • Our TCV was robust, at $10 billion in Q2, which grew 16% YoY , including a mega deal win, using AI -enabled differentiated solutions. • We reiterate our outlook for FY26 International Revenue growth being better than last year. • TCS will continue to be a key jobs provider in the industry. • We want to become the the world’s largest AI-led technology services Company, enabling Business, Government and Society. With that, we wrap up our call today. Thank you all for joining us and wish you and your families a very happy festive season ahead. Thank you.

Thank you, members of the management. On behalf of TCS, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.

This transcript has been edited for readability and does not purport to be a verbatim record of the proceedings.