Why Is TCS Share Rising After Q2 Results? Key Reasons

TCS shares surged nearly 5% after the company announced its Q2 FY27 results. Investors reacted positively to higher profits, improving international demand and growing AI revenue.

TCS reported a 15% YoY rise in net profit to ₹13,884 crore, while revenue grew 11.2% YoY to ₹73,188 crore. Its annualised AI revenue also crossed $3 billion, growing 19% compared with the previous quarter. 

However, despite strong headline numbers, underlying revenue growth remained slow and profit margins were under pressure.

So, why is TCS share rising, and do these results signal a recovery for India's IT sector?

TCS Q2 FY27 Results: How Did the Company Perform?

TCS reported revenue of ₹73,188 crore, up 11.2% year-on-year and 1.3% compared with the previous quarter.

Net profit stood at ₹13,884 crore, with an operating margin of 24%. The company also announced an interim dividend of ₹12 per share.

One important detail is that TCS's official financial statement uses adjusted profit numbers for earlier quarters, excluding exceptional items. On this basis, net profit increased only around 0.3% compared with the previous quarter.

This suggests that while the company maintained profitability, profit growth was relatively limited during the quarter.

The more encouraging developments were the growth in international business, new deal wins and increasing revenue from AI services.

Why Is TCS Share Rising After Q2 Results?

The share-price rally appears to reflect improving demand from international clients, strong growth in AI-related services and expectations that the IT sector could gradually recover.

1. TCS's International Business Is Improving

TCS earns most of its revenue from international customers. Over the past few years, many businesses have been cautious about spending on new technology projects because of economic uncertainty.

However, the latest results suggest that demand is recovering in some industries.

TCS's international revenue grew 1.2% compared with the previous quarter, after removing the impact of currency movements.

The banking and financial services business grew 2.5%, while manufacturing and technology services each grew 3.1%.

The company's UK business also performed well, growing 3.5% during the quarter.

Why is this important?

When companies become more confident about business conditions, they are more likely to spend on technology upgrades, software development and other IT projects. This creates opportunities for companies like TCS.

However, the recovery is not equally strong everywhere.

North America, which contributes 48.3% of TCS's revenue, grew only 0.4% compared with the previous quarter. This means demand is improving in some markets, but a strong recovery across the entire business is still missing.

2. TCS's AI Revenue Has Crossed $3 Billion

One of the biggest highlights of TCS's results was the growth in its AI business.

Annualised AI revenue increased from $2.6 billion in the previous quarter to $3.1 billion, representing growth of approximately 19%.

AI now accounts for more than 10% of TCS's annualised revenue. This matters because artificial intelligence creates both opportunities and challenges for Indian IT companies.

AI can automate tasks such as writing code, testing software and providing customer support. This could reduce demand for some traditional IT services.

However, businesses also need help introducing AI into their existing systems.

For example, a bank might want to use AI to improve customer service. It would still need a technology partner to connect the AI system with its banking software and protect customer data.

Companies like TCS can provide these services.

TCS also announced major partnerships with Porsche and Best Buy, aimed at expanding its role in AI-powered business transformation.

But there is an interesting concern.

While AI revenue grew approximately 19% sequentially, TCS's overall revenue increased only 0.5% after removing currency movements.

This suggests that strong AI growth has not yet resulted in equally strong growth for the entire company.

One possible explanation is that some AI projects are replacing traditional IT work instead of creating entirely new spending. For investors, the bigger question is whether AI can eventually help TCS grow faster overall.

3. Strong Cash Generation and Large Deal Wins

TCS reported $9.6 billion in new deal bookings during the quarter, compared with $9.5 billion in the previous quarter.

These deals provide visibility into potential future revenue because large technology projects generally continue over several years.

However, contract value is not the same as immediate revenue. TCS will recognise revenue gradually as it completes the work. Another encouraging number was the company's operating cash flow.

TCS generated ₹14,190 crore in cash from operations, equivalent to 102.2% of its net profit.

This is important because it shows that the company is collecting cash from its business rather than just reporting accounting profits.

Strong cash generation also provides TCS with more flexibility to invest in AI, expand its services and return money to shareholders.

However, new deal bookings were slightly lower than the $10 billion reported in the corresponding quarter last year. Therefore, while TCS continues to secure large contracts, new deal growth has not accelerated significantly.

TCS Revenue Grew 11%, But Is the Business Really Growing That Fast?

One of the most important details in TCS's results is the difference between reported revenue growth and growth after removing currency movements.

TCS reported 11.2% year-on-year revenue growth in rupee terms. However, revenue grew only 2.8% after removing the impact of currency changes.

Let's understand this with a simple example.

Suppose an Indian IT company earns $100 from an American customer. If one dollar is worth ₹85, the company receives ₹8,500.

Now, if the dollar becomes stronger and is worth ₹95, the same $100 becomes ₹9,500. Revenue in rupees has increased by nearly 12%, even though the company has not earned any additional dollars.

This is why currency movements matter for Indian IT companies.

In TCS's case, the large difference between reported growth and constant-currency growth indicates that currency movements had a significant impact on its reported revenue.

The key takeaway is that TCS's underlying revenue grew only 2.8% year-on-year, despite reporting 11.2% growth in rupees.

The company has returned to positive underlying growth, but the numbers do not yet suggest a strong expansion in business activity.

Why Are TCS's Profit Margins Still Under Pressure?

Despite higher revenue, TCS reported an operating margin of 24%, unchanged from the previous quarter.

Operating margin tells us how much profit a company earns from its main business after paying operating expenses.

For example, a 24% margin means that TCS earns ₹24 in operating profit for every ₹100 of revenue.

For a company of TCS's size, even a small improvement in margins can make a significant difference.

Based on its quarterly revenue of ₹73,188 crore, a one-percentage-point improvement in operating margin would mean approximately ₹732 crore in additional quarterly operating profit, assuming revenue remains unchanged.

TCS is currently investing in AI capabilities, employees and partnerships. These investments can increase expenses before generating additional revenue.

The company has also announced plans to acquire MHP, Porsche's Germany-based consulting subsidiary, subject to regulatory approvals.

While this could expand TCS's business opportunities, the financial impact of the acquisition will become clearer after the transaction progresses.

For investors, margin improvement will be important because higher revenue alone does not always translate into higher profits.

Can TCS's New Deals Support Future Growth?

TCS reported new deal bookings worth $9.6 billion, indicating that customers continue to sign large contracts with the company.

Among the major developments during the quarter were partnerships with Porsche, Best Buy, Honeywell Technologies and Aareal Bank.

These deals cover areas such as AI, engineering, technology upgrades and business transformation.

This shows that TCS is expanding beyond traditional software development and maintenance services.

However, investors should understand that large deal announcements do not immediately increase profits.

For example, if TCS signs a five-year contract worth $500 million, the revenue will generally be earned over the contract period rather than immediately.

Therefore, the important factor is how quickly new contracts translate into revenue.

The company's ability to convert these deals into faster business growth will help determine whether the current recovery continues.

What Should TCS Investors Watch Next?

Although TCS's Q2 results showed some encouraging developments, investors should monitor a few important factors.

• North America recovery: North America contributes nearly half of TCS's revenue but grew only 0.4% sequentially. A stronger recovery in this market would be an important positive sign.
• AI revenue growth: Annualised AI revenue has crossed $3 billion. Investors should watch whether this also leads to faster overall company growth.
• Profit margins: Operating margins remained at 24%. Improvement in margins would indicate that TCS is managing costs effectively while expanding its business.
• New deal conversion: TCS secured $9.6 billion in contracts. The company needs to convert these bookings into actual revenue over the coming quarters.
• Underlying revenue growth: Revenue grew only 2.8% year-on-year after removing currency movements. A sustained increase in this number would provide stronger evidence of recovery.

Author's Take: Is TCS Finally Entering a Recovery Phase?

TCS's Q2 results are encouraging, but it may be too early to conclude that the company has entered a strong growth phase.

The nearly 5% rally reflects improving investor confidence, supported by international business growth, strong cash generation and increasing demand for AI services.

However, the underlying business is still growing slowly.

Revenue growth of 2.8% after removing currency movements remains modest, while North America, the company's largest market, is yet to show a meaningful recovery. The biggest opportunity for TCS is AI.

The company has already demonstrated that businesses are willing to pay for its AI services. However, the real challenge is converting this demand into stronger revenue and profit growth for the entire company.

My view is that TCS is showing signs of stabilisation, but the latest results do not yet confirm a major turnaround.

For long-term investors, the important development will be whether TCS can convert its AI investments and large deal wins into consistently higher revenue and profits.

The Q2 results are a positive step, but a sustained recovery will require stronger business growth, improving margins and better demand across international markets.