Shareholders and investors are not gung-ho on TCS’s biggest bet
Investors and analysts remain uncertain about the biggest rally for the nation’s largest IT services firm since its initial public offering in 2004. The real concern is the lack of detail and the potential impact on profitability.
TCS shares fell more than 1% in afternoon trade.
“Regarding the data center announcement, we are awaiting clarity on capital structure, capex schedule and other details such as potential leases and signed MoUs (MOUs),” Motilal Oswal Financial Services analysts Abhishek Pathak, Keval Bhagat and Tushar Dhonde said in a note dated October 9. “We are currently awaiting clarity on data center investments or related revenue.” “We don’t model it in our forecasts,” he said.
A second brokerage firm said the returns this initiative would generate were uncertain.
“Given that the return on equity of this business is capex-intensive with IRRs of ~20%, it is unclear to us how it will resemble current operating equity of ~50%,” Nomura analysts Abhishek Bhandari and Karan Nain wrote in an Oct. 10 note.
RoE, or return on equity, is a measurement that determines a company’s ability to generate profits from the money invested by shareholders. IRR, short for internal rate of return, measures the rate of return on an investment.
Goal: Hyperscalers, deep tech
On Thursday, during the company’s post-earnings call with analysts (after management canceled its planned press briefing), TCS said it would build out its data center business through a new unit. It plans to invest $6-7 billion to develop capacity up to 1GW in the next 5-7 years.
All data and computing will be hosted in India and the company will look to sell its data service to pure-play AI providers, deep-tech companies and hyperscalers or large-scale cloud service providers.
Additionally, the data center will be a colocation facility where customers such as hyperscalers, AI homegrown companies, Indian companies and the government can bring their own computing and storage power.
Adding to the uncertainty was management’s call to hire an outside team to run the job.
“So, the business itself (we) will keep it separate. In the process of creating a completely separate team outside of TCS for that, that (data center) will have separate management bandwidth, but adjacency with TCS. This is a natural extension in terms of what partnerships we’re looking to create with hyperscalers, what services we want to provide to our customers, and what we want to provide adjacently,” he said. TCS during analyst call.
This work will not immediately contribute much to the company’s income. Management said it “will take another 18 to 24 months for the first revenue to start coming in.”
Concern about profitability
But another brokerage firm said profitability would take a hit.
“We think this direction could offer new potential revenue streams but could negatively impact margins,” BMO Capital Markets analysts Keith Bachman, Adam J. Holets, Bradley Clark and Jonathan Stein wrote in an Oct. 9 note.
BMO analysts added that they “do not foresee near-term top line improvements in related AI services at this point.”
TCS completed the July-September 2025 period with a revenue of $7.47 billion, up 0.6% sequentially. It reported a 25.2% increase in operating margins, up 70 basis points from the previous quarter. A basis point is one hundredth of a percentage point.
Data centers are areas where large servers are stacked on top of each other. These server stacks store computer applications and large amounts of data for companies.
According to a Kotak Mutual Fund note published on September 20, there are four factors driving demand for data centers in India: increase in mobile users, especially on 5G networks, increased cloud adoption, regulatory needs to store data within a geographical boundary, and higher data usage for new applications in general.
Mumbai and Chennai have the highest data center capacity “largely due to offshore cables and availability of uninterruptible power,” according to a Kotak Mutual Fund report. Both cities account for approximately 65% of the country’s total data center capacity. Mumbai and Chennai have data center capacity of 536 MW and 113 MW respectively.
