Tata Consultancy Earnings: Q2 Sees Slight Gains in Banking, Financial Services, and Insurance

Wide-moat Tata Consultancy Services’ second-quarter results came in roughly in line with our top-line expectations, while missing our bottom-line forecast as gross margins remain under the firm’s typical 40%-plus threshold. Still, it is encouraging to see mild recovery in Tata’s largest vertical—banking, financial services, and insurance, or BFSI—amid a soft but stabilized demand backdrop that is prioritizing cost-optimization projects. We believe that the vertical’s continuing recovery will help to bring gross margins back to normal, but we reiterate our belief that the market is overlooking future headwinds for the firm—such as wage inflation—which we believe will significantly offset future margin tailwinds from AI efficiencies. Overall, we are maintaining our fair value estimate of INR 3,050. With shares down by about 1% upon results, this leaves Tata shares still significantly overvalued, in our view.