TCS share price target: Nomura retains 'Buy' after management meet, says this

Nomura said its meeting focused on the growing contribution from artificial intelligence, enterprise readiness, deflation in traditional services and medium- to long-term growth opportunities.

It said TCS is investing about $1 billion annually in AI training, hiring and infrastructure, with the management expecting the impact of deflation to ease and net new AI revenue to accelerate.

The TCS management said annualised AI revenue stood at $3.1 billion, accounting for about 10 per cent of total revenue. AI revenue has grown at a compound quarterly rate of about 15-20 per cent over the past four quarters, Nomura said.

However, only 5 per cent of enterprises are mature enough to use frontier AI at scale. The remaining 95 per cent face constraints such as inadequate data quality and readiness, a lack of integrated infrastructure, and insufficient fine-tuned, AI-ready applications, Nomura noted.

The foreign brokerage said banking, financial services and insurance, and technology are among the early adopters because of better data maturity, regulatory discipline and early investments. Healthcare, life sciences, energy and telecommunications are lagging because of capital constraints and continuing disruption, it said.

It cited the management as saying that customer demands for higher productivity continued to cause deflation in traditional services. TCS has proactively delivered such productivity gains either during contract renewals or by front-loading them in vendor consolidation deals.

The company’s top 200 customers, which contribute about 80-85 per cent of revenue, have largely completed one productivity cycle. Nomura said the management expects incremental deflation to slow unless frontier models undergo a substantial change.

Between the second quarter of FY26 and the second quarter of FY27, TCS recorded positive sequential net growth in every quarter and the management said the overall effect would become more positive once the deflationary drag began to fade and net new AI revenue accelerated, Nomura said.

It said TCS also identified the modernisation of core banking systems as an emerging opportunity. Legacy core banking systems at large banks run on COBOL, while the pool of programmers with expertise in the language has dwindled and many are over 50 years old.

AI could also shorten transformation cycles, which previously took three to four years and discouraged investments. It can parse code, generate technical specifications and modularise systems, potentially reducing the timeline to six to 18 months.

Nomura said enterprises had initially experimented with frontier models at discounted rates, but costs later increased. This has prompted a shift towards smaller, more cost-effective and domain-specific small language models. Apart from lower costs, such models can run on-premises, reduce dependence on a single model provider and provide greater accuracy for specific tasks, the foreign brokerage said.

According to management, frontier models have an efficiency level of about 80-85 per cent, compared with about 90-95 per cent for fine-tuned small language models. TCS sees an opportunity to build and deploy domain-specific models for areas such as credit research. It also views AI governance, including agent monitoring, guardrails and identity provisioning, as a potential major revenue stream.

Nomura quoting Seskaria said margins in AI services were higher than those in traditional services, although the benefit was being offset in the near term by annual investments of about USD 1 billion in training, hiring and infrastructure. TCS prefers to manage margins at the portfolio level rather than on a deal-by-deal basis.

Beyond AI, TCS sees opportunities from a reversal in the expansion of global capability centres in India, as subscale captive centres with 500-2,000 employees may become uneconomical over time.