- You missed the AI tailwind hidden in TCS’s latest rating.
- CLSA reaffirms Outperform with a Rs 2,686 target despite a 20% Nifty IT dip.
- SaaS adoption and ServiceNow partnership are the engines of multi‑digit growth.
- Risks linger: pricing pressure, rupee strength, and a jittery US macro backdrop.
- Bull case: AI‑driven enterprise spend lifts margins; Bear case: macro headwinds stall deal flow.
You missed the AI tailwind hidden in TCS’s latest rating.
While the Nifty IT index slumped nearly 20% this month, CLSA stubbornly kept Tata Consultancy Services (TCS) on an “Outperform” rating, setting a target price of Rs 2,686 per share. The broker argues that the short‑term noise around artificial intelligence (AI) and discretionary tech spending is merely a blip for system integrators (SIs) like TCS, whose business remains fundamentally “business‑as‑usual.”
Why TCS’s Margin Outlook Aligns With Global SaaS Growth
Software‑as‑a‑service (SaaS) continues to be a cornerstone of TCS’s growth story. SaaS refers to cloud‑based applications delivered on a subscription basis, allowing enterprises to scale without heavy upfront capital. According to IDC, the global system and service management software market will expand at a 10% compound annual growth rate (CAGR) from 2024 to 2029. That double‑digit trajectory gives TCS a runway to deepen its automation and workflow‑transformation contracts.
In practice, every new SaaS implementation generates ancillary integration work—design, migration, customization, and ongoing support—where SIs like TCS earn high‑margin fees. As enterprises accelerate their digital backbones, the demand for such services is set to outpace the broader IT spending slowdown.
How ServiceNow’s Surge Fuels TCS’s AI Integration Play
ServiceNow, a leading SaaS platform, reported a 20.5% year‑on‑year constant‑currency (CC) growth for FY25 and projects 19.5–20% CC growth for FY26. Constant‑currency figures strip out foreign‑exchange effects, offering a clearer view of operational performance. ServiceNow’s robust order book signals a healthy pipeline of large‑scale automation projects.
CLSA points to TCS’s expanded partnership with ServiceNow as a catalyst for AI‑driven enterprise transformation. ServiceNow has also aligned with foundation model providers like Anthropic and OpenAI. “Foundation models” are large‑scale AI systems that can be fine‑tuned for specific tasks, dramatically reducing development time and cost. When enterprises adopt these models via ServiceNow’s platform, they inevitably need seasoned integrators to embed, customize, and secure the solutions—work that TCS is uniquely positioned to deliver.
Competitive Landscape: TCS vs. Infosys & Wipro in the AI Race
Peers such as Infosys and Wipro are also courting AI and SaaS opportunities, but TCS maintains a lead in several dimensions. First, its revenue from “Digital & Cloud Services” grew at a 14% YoY rate in Q3 FY25, outpacing Infosys’s 11% and Wipro’s 9%. Second, TCS’s global delivery network spans 45+ delivery centers, enabling it to execute large, multi‑geography contracts more efficiently.
Moreover, TCS’s strategic alliance with ServiceNow is deeper than the relatively newer engagements of its rivals. While Infosys partnered with Microsoft’s Azure AI, and Wipro with Google Cloud, TCS’s joint go‑to‑market initiatives with ServiceNow include co‑innovation labs and joint sales pursuits in the APAC region—a market where IT spend is expected to outgrow the global average.
Historical Parallel: TCS’s 2016 Cloud Bet and What It Means Now
Back in 2016, TCS announced a $1 billion investment in cloud capabilities, a move that was initially met with skepticism as the Indian IT sector wrestled with low‑margin legacy services. Fast forward, that bet paid off: cloud‑related revenue now constitutes roughly 25% of TCS’s total billings, and the firm’s operating margin improved from 22% in FY18 to 24.5% in FY25.
The current AI‑SaaS wave mirrors that earlier transition. Companies that embraced the cloud early are now reaping the benefits of higher‑margin, recurring‑revenue streams. TCS’s early partnership with ServiceNow, established in 2022, is a modern equivalent of the 2016 cloud push, positioning the firm to capture a similar upside in the AI era.
Investor Playbook: Bull and Bear Scenarios for TCS
Bull Case: AI adoption accelerates faster than consensus, driven by foundation‑model integration across ServiceNow’s ecosystem. TCS secures multiple multi‑year, $500 million+ contracts, lifting its digital‑services margin to 30% by FY28. The rupee stabilizes, easing foreign‑exchange translation risk, and the company’s earnings per share (EPS) CAGR surpasses 15%.
Bear Case: Global macro headwinds—rising US bond yields, inflationary pressures, and protectionist tariffs—squeeze enterprise budgets. Deal wins lag expectations, pricing pressure erodes margins, and a stronger rupee reduces dollar‑denominated revenue when converted to INR. TCS’s share price could trade below its target, delivering sub‑10% total returns over the next 12 months.
Given the balance of forces, the “Outperform” rating reflects CLSA’s view that upside potential outweighs near‑term risks. Investors seeking exposure to India’s premier IT services firm should monitor quarterly deal pipelines, ServiceNow’s growth trajectory, and macro indicators such as US Treasury yields and INR/USD movements.