TCS Q2: 11% Growth in Rupees, 2.8% in Constant Currency. Where the Margin Went.

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

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:

• 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]):

• 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):

The AI line

TCS discloses AI revenue each quarter, as an annual run-rate:

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 (NSE)
• [RES] TCS audited results with segment information, Q2 FY27 (NSE)
• [Q1] Q1 FY27 press release · [Q4] Q4 FY26 · [Q3] Q3 FY26 · [Q2'] Q2 FY26 · [Q1'] Q1 FY26 · [Q4'] Q4 FY25 · [Q3''] Q3 FY25 · [Q2''] Q2 FY25 (all NSE)
• [BBY] TCS, acquisition of BBY Services India LLP, 1 Oct 2026 (NSE)
• [CALL] TCS Q2 FY27 earnings call, 8 Oct 2026 (audio link filing); our machine transcript
• [MS] Moat & Margin, Moat Screener and How MoatSCORE works

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.