1、M Idea1QF26 revenues surprised negatively vs.low expectations:TCSs international revenues declined 0.5%QoQ in CC terms in 1Q while North America grew qoq,weakness persisted across other geographies(Europe/UK)and multiple verticals.Management saw pauses and deferrals by clients,more toward the end of

2、 the quarter,which led to a mismatch between demand and supply(capacity created in headcount)and affected margins.Despite continued uncertainty,deal wins were in line;commentary on the pipeline is also reasonably strong.TCS also clarified that no client-specific challenges hurt its growth;rather,it

3、cited macro challenges.Commentary indicated hope of a recovery after July,but we sense limited clarity and confidence in this.Core business margins have been weak for the last two quarters operating deleverage playing out:We note that ex telecom business(which includes impact of the BSNL contract ra

4、mping down),core business margins are down 200bps over the last two quarters.This implies operating deleverage higher headcount and variable pay,selective interventions on promotions which are done periodically.etc.ate into margins while revenues in core markets were flattish.We build in stable marg

5、ins in F26 but project an improvement of 50bps in F27 via operating leverage as well as improved business mix.Trimming earnings estimates and price target;maintain relative OW:Following these results,we are lowering our F26 revenue growth estimate to-2%(from flat)and reduce F26-28e EPS 2-4%.We trim

6、our price target 2.4%,to Rs3,690(implies 24x two-year forward P/E).We maintain our relative OW rating.F26 would be one of the worst ever years for EBIT growth for TCS,giving hope for some recovery in F27.The stock is trading at a two-year forward FCF multiple of 22.6x,similar to its 14-year average.