> ## Content Index > Fetch the complete content index at: https://www.moatmarginresearch.com/llms.txt > Use this file to discover other available public pages before exploring further. # TCS Q2: 11% Growth in Rupees, 2.8% in Constant Currency. Where the Margin Went. - URL: https://www.moatmarginresearch.com/tcs-q2-fy27-moat-margin/ - Published: 2026-10-09T03:09:50.000Z - Updated: 2026-10-09T03:09:49.000Z - Description: TCS revenue rose 11.2% in rupees but 2.8% in constant currency. Its margin slipped to 24.0% as other costs rose. AI revenue is $3.1 billion. Our moat and margin - Author: A K Karthikeyan - Tags: Moat Insights **TCS reported Q2 revenue up 11.2% to ₹73,188 crore. In constant currency, which strips out the weaker rupee, growth was 2.8%. The operating margin was 24.0%, down from 25.2% a year ago, and staff costs didn't cause the fall: other operating expenses rose from 12.5% to 15.2% of revenue. Annualised AI revenue reached $3.1 billion. Read for moat and margin: the client base is holding; pricing power is not yet showing.** ## What the filing says | | Q2 FY26 | Q2 FY27 | Source | | ----------------------------------------- | --------------- | ---------------------- | --------------- | | Revenue | ₹65,799 crore | ₹73,188 crore (+11.2%) | \[PR\] | | Growth in constant currency, year on year | −3.3% | +2.8% | \[Q2'\], \[PR\] | | Operating margin | 25.2% | 24.0% | \[Q2'\], \[PR\] | | Net profit, excluding one-offs | ₹12,904 crore | ₹13,884 crore (+7.6%) | \[PR\] | | Deals signed (TCV) | US$10.0 billion | US$9.6 billion | \[Q2'\], \[PR\] | | Headcount | not given | 598,056 | \[PR\] | The rupee did most of the work. Revenue grew 11.2% in rupees, but only 2.8% in constant currency; the gap of about 8 points is currency (our arithmetic). And 2.8% is measured against a quarter that had fallen 3.3%. ## The slowdown, quarter by quarter TCS's own filings trace the IT services slowdown: | Quarter | Growth in constant currency, year on year | Operating margin | Deals signed (TCV) | | ------- | ----------------------------------------- | ---------------- | ------------------ | | Q2 FY25 | +5.5% | 24.1% | not given | | Q3 FY25 | +4.5% | 24.5% | US$10.2 bn | | Q4 FY25 | +2.5% | 24.2% | US$12.2 bn | | Q1 FY26 | −3.1% | 24.5% | US$9.4 bn | | Q2 FY26 | −3.3% | 25.2% | US$10.0 bn | | Q3 FY26 | −2.6% | 25.2% | US$9.3 bn | | Q4 FY26 | −0.6% | 25.3% | US$12 bn | | Q1 FY27 | +3.2% | 24.0% | US$9.5 bn | | Q2 FY27 | +2.8% | 24.0% | US$9.6 bn | - **FY26 shrank.** Revenue fell 2.4% in constant currency for the year (\[Q4\]). - **The recovery is shallow.** Sequential growth in constant currency was 0.8%, 0.8% and 1.2% through FY26, then 0.4% and 0.5% in the last two quarters (\[Q3\], \[Q4\], \[Q1\], \[PR\]). - **Headcount fell, then came back.** 613,069 in June 2025 (\[Q1'\]), 584,519 in March 2026 (\[Q4\]), 598,056 now (\[PR\]). ## Where the margin went The operating margin stepped down from 25.3% in Q4 FY26 to 24.0% in Q1 FY27, and stayed there. The cost lines show why (our arithmetic from \[PR\]): | Share of revenue | Q2 FY26 | Q2 FY27 | | ------------------------------- | ------- | ------- | | Employee costs | 58.7% | 57.2% | | Other operating expenses | 12.5% | 15.2% | | Equipment and software licences | 1.5% | 1.8% | | Depreciation | 2.1% | 1.7% | - **Staff costs didn't cause the fall.** Employee costs fell 1.5 points as a share of revenue. On the call, the CFO said part of that is a lower performance-bonus payout this quarter \[CALL 44:12\], so it isn't all efficiency. - **Other operating expenses rose 35%**, to ₹11,131 crore, against 11.2% revenue growth. The filing doesn't break this line down. The call does: TCS has "invested in a higher bench" and hired more subcontractors to cover skill gaps \[CALL 06:03, 23:45\], and partnership costs sit in project expenses \[CALL 53:24\]. These are capacity costs paid ahead of revenue, not price cuts. - **Every segment except Consumer lost margin** (\[RES\], our arithmetic): | Segment | Revenue growth | Segment margin, Q2 FY26 → Q2 FY27 | | --------------------------------- | -------------- | --------------------------------- | | BFSI | +12.3% | 26.5% → 25.5% | | Manufacturing | +10.8% | 30.5% → 27.8% | | Consumer Business | +7.6% | 27.7% → 29.8% | | Communication, Media & Technology | +10.8% | 28.9% → 26.8% | | Life Sciences & Healthcare | +10.2% | 27.5% → 25.3% | | Others | +14.9% | 24.1% → 17.3% | ## The AI line TCS discloses AI revenue each quarter, as an annual run-rate: | Quarter | Annualised AI revenue | | ------- | ------------------------------------------------- | | Q3 FY26 | US$1.8 billion (\[Q3\]) | | Q4 FY26 | US$2.3 billion (\[Q4\]) | | Q1 FY27 | US$2.6 billion (\[Q1\]) | | Q2 FY27 | US$3.1 billion, "crosses 10% of Revenue" (\[PR\]) | The AI line is growing fast while total revenue grows at 2.8%. On these numbers, much of the AI revenue is replacing older work rather than adding to it. The filings don't separate the two. ## The deals: buying capability centres - **Porsche and MHP.** A five-year partnership with Porsche, and TCS will buy 100% of MHP, Porsche's German management and IT consulting subsidiary, subject to approvals (\[PR\]). No price was disclosed. - **Best Buy.** TCS is taking over Best Buy's India capability centre, about 450 people, for ₹1 lakh, under a multi-year agreement to run it as an "AI Capability Center" (\[BBY\], \[PR\]). Both follow the same pattern: TCS takes over a client's in-house technology team and signs a long contract around it. That pattern feeds the moat directly, because the client's own people and systems now sit inside TCS. ## What management said on the call From our transcript of the 8 Oct call (\[CALL\]; timestamps in brackets): - **Demand hasn't changed.** CEO K Krithivasan: "The demand environment has not materially changed since last quarter, and discretionary programs without near-term value remain under scrutiny." \[04:34\]. He said that "on a medium term basis" TCS is "confident the growth momentum will continue", citing deals and pipeline, but wouldn't comment on the next quarter \[22:04\]. - **The AI squeeze is real, and not over.** Asked whether AI's new work now outweighs the revenue it removes in banking and tech, Krithivasan said "there is a deflation because of the productivity benefit", offset partly by modernisation and vendor-consolidation work. He would not call the squeeze over. \[22:38–23:27\]. - **Pricing is roughly stable, he says.** CFO Samir Seksaria said there is "some front-loading of productivity benefits" for clients, offset by better pricing on AI revenue. Revenue per employee has slipped slightly, "not a significant one" \[40:21\]. - **AI revenue earns more than average.** Seksaria said the US$3.1 billion of AI revenue comes at "a much higher margin than our company average". \[45:44\]. - **The margin path is slow.** The 26–28% long-term aspiration stays \[27:55\]. In the second half, MHP will cost about 50 basis points depending on when it closes, plus the usual December-quarter furloughs. Seksaria: "an uphill task", but TCS will try to "inch up on our margins". \[32:38\]. - **Signings exclude the big deals.** The US$9.6 billion TCV does not include Porsche or Best Buy \[03:18\]. - **MHP isn't about cost.** Asked whether clients hand over teams to bank AI productivity, Krithivasan: "This has got nothing to do with productivity. This is about how they transform themselves as an organization." \[51:53\]. The aim, he said, is to help Porsche transform its engineering and supply chain with AI. - **India fell on one deferral.** India revenue fell about 10% in the quarter because of a project deferral, which TCS expects to return \[24:43\]. - **Data centres are slow money.** Revenue starts 18–24 months after a contract is signed \[46:29\]. ## Moat and margin **Focus moat: switching costs.** TCS runs core systems for large clients under multi-year contracts; replacing it is slow and risky. The evidence: - **Present.** Deal signings held at US$9–12 billion a quarter through the downturn. Revenue shrank only 2.4% in FY26's slump. The Porsche and Best Buy deals deepen the lock-in. - **Under pressure.** Clients are spending, but growth is 2.8% and margins are lower. Management calls pricing roughly stable, yet says clients get "some front-loading of productivity benefits" and revenue per employee is slipping. A moat that keeps clients but has to give back productivity is narrower than one that keeps both. **The margin.** TCS still calls its profitability "industry-leading" (\[PR\]). But the margin is 24.0%, joint-lowest with Q1 FY27 in this nine-quarter series. The pressure is in subcontractors, bench and partnerships, which management frames as investment, and MHP adds about 50 bps of dilution in the second half \[CALL\]. The 26–28% band is an aspiration, not a near-term target. Cash conversion stayed strong: operating cash flow was 102.2% of net profit (\[PR\]). **MoatSCOREs** (Moat Screener, IT services, all first-pass): Wipro 5.39, TCS 5.15, Tech Mahindra 5.11, HCL Technologies 5.05, Infosys 4.76 (\[MS\]). All are AMBER+; LTIMindtree is not yet scored. ## What it says about the sector These are TCS's filings only; Infosys, HCL and Wipro report later in October. What TCS's numbers show: 1. **Demand has stopped shrinking.** Growth in constant currency turned positive in Q1 FY27 after four quarters of decline. 2. **It hasn't re-accelerated.** Sequential growth slowed to 0.4–0.5% in the last two quarters. 3. **AI is now material.** At US$3.1 billion a year it is over 10% of revenue, and TCS's deals are being written around it. 4. **The cost of the shift shows in margins**, not headcount. ## The bear case - **Currency, not demand.** About 8 of the 11.2 points of growth came from the rupee. - **AI may shrink the old work faster than the new work grows.** Total growth of 2.8% beside a fast-rising AI line suggests some replacement. - **The margin step-down has held for two quarters**, and the main cost line behind it isn't explained in the filings. - **Acquisitions cost money and margin.** The MHP price is undisclosed; management puts its margin drag at about 50 bps. - **Part of the staff-cost saving is a lower bonus**, which can reverse. ## The case for - **Clients stayed.** Deal signings held through four quarters of decline. - **Growth is positive again**, two quarters running. - **Cash conversion is strong**, and TCS keeps paying dividends: ₹12 a share this quarter. - **The capability-centre deals deepen switching costs.** ## What to watch 1. **TCS's official call transcript**, to confirm the quotes above. 2. **Q3 FY27 sequential growth**: above 1% would mark a real pickup. 3. **Other operating expenses** as a share of revenue: whether 15% is the new level. 4. **Infosys, HCL and Wipro results** in October: whether the slowdown pattern is sector-wide. 5. **The MHP price**, when TCS discloses it. ## Sources - **\[PR\]** [TCS press release, Q2 FY27, 8 Oct 2026](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F08102026154325%5FPressReleaseletter.pdf) (NSE) - **\[RES\]** [TCS audited results with segment information, Q2 FY27](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F08102026153124%5FPost%5FBM%5FSE%5FLetter%5Ffin.pdf) (NSE) - **\[Q1\]** [Q1 FY27 press release](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F09072026155553%5FPress%5Frelease%5Fsigned.pdf) · **\[Q4\]** [Q4 FY26](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F09042026155806%5FPressReleaseletter%5Fsigned.pdf) · **\[Q3\]** [Q3 FY26](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F12012026155540%5FPressReleaseletter.pdf) · **\[Q2'\]** [Q2 FY26](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F09102025155609%5FPressReleaseletter.pdf) · **\[Q1'\]** [Q1 FY26](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F10072025160055%5FBM%5FOutcome%5F-%5FJuly%5F2025%5F%5Fpressrelease.pdf) · **\[Q4'\]** [Q4 FY25](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F10042025161039%5FBM%5FOutcome%5F-%5FApril%5F2025%5F%5Fpressrelease%5Fsigned.pdf) · **\[Q3''\]** [Q3 FY25](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F09012025161752%5FSE%5FLetter%5F-%5Fpress%5Freleasesigned.pdf) · **\[Q2''\]** [Q2 FY25](https://nsearchives.nseindia.com/corporate/TCS%5F10102024161115%5FPressReleaseletter.pdf) (all NSE) - **\[BBY\]** [TCS, acquisition of BBY Services India LLP, 1 Oct 2026](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F01102026182634%5FSigned%5FSE%5FLetter.pdf) (NSE) - **\[CALL\]** TCS Q2 FY27 earnings call, 8 Oct 2026 ([audio link filing](https://nsearchives.nseindia.com/corporate/TCS%5FCORPCS%5F08102026223847%5FSEInt09072026%5Fsigned.pdf)); our machine transcript - **\[MS\]** [Moat & Margin, Moat Screener](https://www.moatmarginresearch.com/moat-screener/) and [How MoatSCORE works](https://www.moatmarginresearch.com/moatscore/) --- > Educational research, not investment advice. Every figure above is drawn from TCS's own filings, read from the primary documents on 9 October 2026; segment margins, cost ratios and the currency effect are our arithmetic, labelled as such. MoatSCOREs read live from the Moat Screener on 9 October 2026\. No buy/sell recommendations, no price targets, no share prices. Moat & Margin is not a SEBI-registered Research Analyst or Investment Adviser.