Ladies and gentlemen, thank you for holding for the TCS Earnings Conference call. We would like to provide you with a few instructions. To ask a question, you may enter star one on your phone. All participants are requested to use only handsets while asking a question. Please ensure there is no background noise while addressing your questions to the management. You may be asked to return to the question queue if you do not have a clear connection. Thank you. The conference will begin shortly. Please continue to hold. Ladies and gentlemen, thank you for holding for TCS Earnings Conference call. We would like to provide you with a few instructions. To ask a question, you may enter star one on your phone. All participants are requested to use only handsets while asking a question. Please ensure there is no background noise while addressing a question to the management.
You may be asked to return to the question queue if you do not have a clear connection. Thank you. The conference will begin shortly. Please continue to hold. Ladies and gentlemen, thank you for holding for the TCS Earnings Conference call. We would like to provide you with a few instructions. To ask a question, you may enter star one on your phone. All participants are requested to use only handsets while asking a question. Please ensure that there is no background noise while addressing your questions to the management. You may be asked to return to the question queue if you do not have a clear connection. The conference will begin shortly. Please continue to hold. Thank you. Ladies and gentlemen, thank you for holding for the TCS Earnings Conference call. We would like to provide you with a few instructions.
To ask a question, you may enter star one on your phone. All participants are requested to use only handsets while asking a question. Please ensure that there is no background noise while addressing your questions to the management. You may be asked to return to the question queue if you do not have a clear connection. Thank you. The conference will begin shortly. Please continue to hold.
Ladies and gentlemen, good day and welcome to the TCS Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Nehal Shah from the Investor Relations Team at TCS. Thank you, and over to you.
Thank you, Operator. Good evening and welcome, everyone. Thank you for joining us today to discuss TCS's financial results for the third quarter of fiscal year FY 2026 that ended on December 31st, 2025. This call is being webcast through our website, and an archive including the transcript will be available on the site for the duration of this quarter. The financial statement, quarterly fact sheet, and press releases are also available on our website. Our leadership team is present on this call to discuss our results. We have with us today Mr. K. Krithivasan, Chief Executive Officer and Managing Director.
Hello, everyone.
Ms. Aarthi Subramanian, Executive Director, President, and Chief Operating Officer.
Good evening, everyone.
Mr. Samir Seksaria, Chief Financial Officer.
Hello, everyone.
Mr. Sudeep Kunnumal , Chief Human Resources Officer.
Hello, everyone.
Our management team will give a brief overview of the company's performance, followed by a Q&A session. As you are aware, we don't provide any specific revenue or earnings guidance, and anything said on this call, which reflects our outlook for the future or which could be consumed as a forward-looking statement, must be reviewed in conjunction with the risk that the company faces. We have outlined these risks in the second slide of the quarterly fact sheet available on our website and emailed out to those who have subscribed on our mailing list. With that, I would like to turn the call over to Krithi.
Thank you, Nehal. Good evening, everyone. Wish you all a very, very happy New Year. The growth momentum we witnessed in Q2 of FY 2026 continued in this quarter. In Q3, we delivered INR 67,887 crore in revenue. In reported currency, our revenue grew by 2% sequentially and 4.9% on a year-on-year basis. In constant currency, our revenue grew 0.8% sequentially. Our international services revenue grew by 0.4% sequentially. Growth was led by Consumer Business Group , Energy, Resources, and Utilities , Life Sciences and Healthcare , and Communications, Media, and Information vertical. BFSI and Technology, Software, and Services did well, adjusted for seasonality. Among major markets, Europe continued to do well, while North America was flattish. Regional markets continued to deliver strong growth. All next-gen service lines continued to grow well sequentially. Most client segments showed improvement.
On an LTM basis, this quarter, we gained two additional clients generating more than INR 100 million in revenue, eight clients exceeding INR 20 million, and 23 clients bringing in over INR 1 million each. On Q3, our Q3 operating margin stood at 25.2%, remaining stable sequentially. This excludes the one-off. We remain steadfast in our ambition to become the world's largest AI-led technology services company, guided by a comprehensive five-pillar strategy. We are delivering accelerated value to our clients through strategic investments across all the full AI stack, from infrastructure to intelligence. Our AI services now generate $1.8 billion in annualized revenue and is growing at 17.3% quarter on quarter in constant currency. In Q3, we continued to win several large deals across markets and industries, including one mega deal win in North America. We achieved an overall TCV of $9.3 billion. BFSI TCV was at $3.8 billion.
Consumer business TCV was at $1.4 billion, and North America TCV stood at $4.9 billion. Based on the client conversations, strong deal momentum, and the leadership we are gaining in AI, we are confident of a good calendar year 2026. I'll now invite Samir to share further details on our financial performance.
Thank you, Kriti. Good day, everyone. Just re-highlighting the revenue numbers. It's INR 67,087 crores. That's a QOQ growth of 2% in Rupee terms and 4.9% YOY. In constant currency terms, it's 0.8% sequentially. Coming to margins, improvements in productivity, pyramid, and other operational efficiencies delivered an 80 basis points benefit. Favorable currency movements contributed an additional 20 basis points. Full quarter impact of the wage increases announced last quarter had a negative impact of 50 basis points. Investments in brand building and partnerships had an impact of 50 basis points. All of the above resulted in stable operating margins at 25.2%. The operating margin excludes a few one-off items recognized during this quarter. These exceptional items relate to severance-related expenses, legal provisions, and the impact of changes in India wage code. Our net income margin was at 20%, and our EPS grew 8.5% YOY terms.
Our accounts receivable was at 76 days outstanding in dollar terms. Net cash from operations was at $1.6 billion, which is 130.4% of net income. Key cash flows were at $1.4 billion, and invested funds at the end of the period stood at $7.1 billion. Our sustained margin performance and strong cash conversion this quarter reflects our disciplined execution and strong financial resilience. Backed by a robust balance sheet, we continue to invest confidently in strategic growth areas. Executing our five-pillar AI strategy at speed and scale is central to our transformation in an AI-first enterprise and delivering long-term value to our stakeholders. Our capital allocation policy remains unchanged. That is to give substantial free cash flows back to our shareholders. The board has recommended an interim dividend of INR11 per share and a special dividend of INR46 per share. I would now like to invite Aarthi.
Thank you, Samir. Good evening, everyone. I would like to begin by wishing all of you a great year ahead. As you know, this quarter, we hosted our analyst day on 17 December 2025. We provided a comprehensive view of our strategy and approach to realize our stated ambitions. We covered our full-stack AI play across infrastructure to intelligence. We provided details on the five strategic pillars powering our AI transformation, and we also provided a complete view of our approach encompassing employees, customers, partners, and the larger AI ecosystem stakeholders. From a Q3 perspective, multiple service lines delivered growth. AI and data, enterprise solutions, IoT and digital engineering, and cybersecurity led the growth this quarter. Our annualized AI revenue crossed INR 1.8 billion, with 17.3% Q on Q growth in constant currency.
The rate of production deployments for AI in 2025 showed a marked improvement over the prior year, with performance in Q3 further reinforcing this positive trend. Last quarter, I talked about how our AI innovation days and rapid build approach are making AI real for our customers. With many of the enterprises looking to jump-start and scale their AI transformation, AI innovation days and rapid builds are fast becoming our core levers to drive differentiated customer engagement. I would like to share updates on key pillars of our AI transformation. First one is our own internal transformation, codenamed TCS to the Power AI. In Q3, we continued to democratize access to all AI tools and further built on the success of the world's largest AI hackathon we conducted in Q2. AI Friday hackathons, the in-person immersive format, have created significant engagement and buzz among our employees.
It has enabled them to explore and develop their talents while also allowing them to learn about the fast-changing capabilities of AI. This initiative has been particularly effective in bridging boundaries between seniors and juniors, as well as experts and beginners. 26 teams reached the finals, which were conducted in Q3, and this generated more than 15 patentable solutions. We continue to scale our own adoption of AI across TCS. This quarter, we launched AI-first solutions in hiring and employee onboarding. We also scaled our AI-powered personalized learning platform, the Learning Coach. Redefining service lines with AI is a strategic priority. During the analyst day, we shared details of our unified human plus AI services autonomy model. This includes five levels of autonomy from using AI as a tool at level one to building an agentic enterprise at level five. This has been instantiated for every service line.
This structured approach has been well received by our customers as it aligns to their AI-driven transformation initiatives with clearly defined goals and outcomes. For example, for a global insurer, we improved software engineering practices from level two autonomy to level three autonomy, thereby delivering 2x improvement in deployment frequency and 30% reduction in time to market. For a leading U.K. airline, we have compressed major incident cycles by half, resulting in 40% higher operational efficiency using our march-to-zero IT operations framework. In Q3, we sustained our focus to innovate, build, and scale AI solutions for clients across industries. We see the innovate-to-build cycle accelerating sharply, with over three times more rapid builds that we delivered for our customers this quarter.
We set up two AI labs in India, one for a leading U.S. insurer to scale agentic transformation across insurance value chain and software engineering, and another for a regional U.S. bank for agentic AI-led operations in KYC and AML investigations. These labs are helping our customers incubate and create a strong pipeline for AI rapid builds. We also delivered several high-impact AI implementations, showcasing measurable business value by combining traditional AI, GenAI, and agentic AI capabilities. I would like to share a few examples of our customer success stories this quarter. Our team played a key role in reimagining store operations with multiple agents automating routine interventions, boosting sales by 25%, and saving store managers 90 minutes on their weekly efforts. TCS won the IoT Breakthrough Award 2026 and was recognized as the AI-powered IoT solution provider of the year.
TCS is the only GSI to win in these categories. We developed this solution for a leading integrated containers logistics company. TCS brought together traditional AI, vision AI, and IoT solutions to deliver significant improvements in safety posture at the terminal. In summary, Q3 saw good traction across services in a traditionally soft quarter. Going forward, we will continue to engage with our customers with a two-pronged focus. First, get AI ready. Partner with our customers to build a strong enterprise technology foundation required for their AI transformation. Secondly, lead with AI. Engage with business and technology teams to help them establish early competitive advantage in AI. Thank you. I would now like to hand over to Sudeep.
Thank you, Aarthi. Hello everyone again, and wishing you a very happy new year. Our associates are at the heart of our transformation into AI-first enterprise. The passion and commitment our associates show in mastering future-ready skills gives us the confidence to innovate responsibly and deliver sustainable value as AI reshapes the services landscape. At the end of Q3 FY26, our global headcount stands at 582,163, with associates from 149 nationalities and 35.1% women. The last 12 months' voluntary attrition in IT services stands at 13.5%, up 20 basis points sequentially. We continue to make significant investments in building high-performance workforce with future-ready skills. 51.2 million learning hours have been completed year-to-date. 3.8 million competencies have been acquired year-to-date. We now have 217,000+ employees with higher-order skills in AI, which is a 3x increase over last year. The second aspect of our talent transformation is role evolution.
AI is creating new roles such as rapid build engineers and leads, which are increasingly vital for the future. We are currently working on aligning our role framework with AI as the centerpiece. All components of this framework are being systematically reviewed to ensure future-readiness. The third aspect is future-ready hiring. We continue to focus our efforts in attracting top talent globally. Over the last year, we have doubled down on advisory and consulting talent across the big bets in areas like cybersecurity, enterprise solutions, cloud, AI, and data, and positioning them closer to our customers. Over 50% of our experienced hires are coming with next-gen skill sets. We hired a significant number of AI-native fresh graduates. Our initial learning programs have been enhanced to include GenAI as an integral part of the curriculum.
All trainees now have access to a comprehensive AI ecosystem of learning and for hands-on assessment platforms. As part of our pioneering industry academy collaboration, we are actively involved in designing industry-relevant curriculum. All components of this framework are systematically reviewed to ensure future-readiness. The third aspect is future-ready hiring. We continue to focus our efforts in attracting top talent globally. Over the last year, we have doubled down on advisory and consulting talent across the big bets in areas like cybersecurity, enterprise solutions, cloud, AI, and AI and data, and positioning them closer to customers. Over 50% of our experienced hires are coming with next-gen skill sets. We hired a significant number of AI-native fresh graduates. Our initial learning program has been enhanced to include GenAI as an integral part of the curriculum. All trainees now have access to a comprehensive AI ecosystem of learning hands-on assessment platforms.
As part of our pioneering industry academy collaboration, we are actively involved in designing industry-ready curriculum. TCS EPEX , Mega Faculty Development Program, is focused on faculty development from academia with knowledge of new-age technologies. Our future-ready talent model and our talent development programs are gaining market recognition. Recently, we were ranked number one in Everest Group's PEAK Matrix for talent readiness for next-generation data analytics and AI services. Featured on Forbes' America's Best Employers for Engineers 2026, ranked number one technology services firm globally in Newsweek's magazine 2026 ranking of America's most reliable companies. I would now like to invite you back. Thank you, Sudeep. Let me now share more details on the performance across the industry verticals. BFSI continues to show good growth momentum despite the current quarter seasonality and being impacted by the furloughs. BFSI achieved an overall TCV of $3.8 billion, up by $600 million Q1Q.
This includes one mega deal in BFSI North America. This comes on the back of a mega deal that we had announced in the previous quarter as well. Even excluding the mega deal, BFSI TCV and pipeline continue to be robust. BFSI organizations continue to exercise cost discipline while prioritizing targeted investment in resilience, compliance, and operational efficiency. Technology expenditures remain centered on validated solutions and simplified architectures. AI adoption is increasing, underpinned by robust governance and regulatory alignment, although agentic AI implementation is proceeding cautiously. Retail banks are focused on enhancing customer experience, adopting AI applications, leveraging ecosystem partnerships, and strengthening fraud prevention efforts. Corporate banks are modernizing their operations through cloud migration and digital enhancements. The payment sector is experiencing rapid transformation driven by regionalization, whereas capital markets and asset management sectors maintain strong performance. Modernization initiatives are being prioritized by BFSI clients.
The insurance industry is adapting to new sources of disruption, including emerging risk products and AI integration. Brokerage and agency channels are consolidating in response to shifting market dynamics. This quarter, several significant project deployments were realized. For a major global insurer, TCS implemented an AI-powered underwriting solution that shortened code turnaround time from weeks to hours with improved accuracy. For a Finnish insurance company, an AI-driven quality assurance framework was delivered, reducing manual testing efforts by 70%. TCS successfully launched three large-scale cloud-based modernization programs for leading BFSI clients in Q3, resulting in quicker product launches, strengthened security postures, and enhanced operational efficiency. Our consumer banking group saw sequential growth led by retail, travel, and hospitality segments. Our Consumer Business Group saw sequential growth led by retail, travel, and hospitality segments, reflecting pockets of resilience and cautious optimism. Americas, Europe and APAC grew, while the U.K. faced ongoing challenges.
Retailers focused on value-driven strategies, digital engagement, and AI-powered personalization to offset cost pressures and margin challenges. CPG companies prioritized health, premiumization, and operational efficiency through AI and automation. Travel, transport, and hospitality benefited from strong international travel and digital transformation, though domestic markets remained subdued. The Life Sciences and Healthcare sector saw good growth momentum this quarter. The sector is undergoing multiple shifts across industry segments led by regulatory interventions, impact of AI, risk and security challenges, and changing consumer behavior. Biopharma manufacturers are heavily investing in automation, continuous manufacturing, robotics, and AI-driven labs to enhance efficiency and sustainability. The majority of life sciences companies have adopted or piloted generative AI, especially for drug discovery and automating literature reviews. Investments in digital health tools, telemedicine, wearables, and remote patient monitoring are surging. AI-enhanced diagnostic tools such as radiology AI and rapid pathogen detection systems are high priorities.
Providers and payers are spearheading AI deployment and revenue cycle management, clinical workflows, utilization, and network management moving beyond pilot projects. Spend on cloud infrastructure, cybersecurity, data governance, and edge computing is on the rise. Manufacturing posted marginal growth in Q3. While the automotive sector remained subdued, other industries demonstrated growth momentum even in the face of seasonal challenges. Investment in smart manufacturing persists as both agentic and physical AI enhance competitiveness, agility, and resilience during ongoing market uncertainty. In this quarter, TCS delivered several AI-powered agents, specialized fine-tuned models, and vision-based solutions that automate complex tasks, enhance customer and dealer experiences, and drive operational efficiency. These initiatives have resulted in measurable business outcomes for our clients, such as reduced manual effort, accelerated time to market, improved decision-making, and significant cost savings. We expanded our 18-year partnership with ABB, a global leader in electrification and automation.
The partnership aims to modernize ABB's global hosting operations, simplifying its IT landscape, and strengthen its digital foundation to drive resilience and innovation. As part of this multi-year engagement, TCS will operationalize ABB's future hosting model, a next-generation modular IT infrastructure designed to streamline systems. This model will enable predictive operations, faster service restoration, and continuous security assurance through its AI-powered Zero Ops framework. Our Technology, Software, and Services group degrew in Q3 primarily due to typical Q3 seasonality. While the big tech companies are investing significantly in AI infrastructure and building frontier AI capabilities, the broader industry is facing ongoing geopolitical uncertainty, trade restrictions, and evolving data and AI regulations. This quarter, workforce restructuring continued major layoffs among top clients. Customers are focusing on AI development, operational efficiency, and manufacturing diversification to manage risk and drive growth.
Semiconductor and electronics segments are seeing moderate growth, especially in AI hardware, while industrial and automotive electronics remain weak. Investment in semiconductor manufacturing and R&D are rising, particularly in the U.S., India, and Europe. Network growth is flat overall, with enterprise networking benefiting from increased AI infrastructure demand. Software companies are steadily integrating agentic AI and moving products to the cloud. Professional services continue to experience lower growth. Cost optimization is a key client priority. We are supporting digital transformation and efficiency through AI-powered operations, modernization of engineering environments, SaaS optimization, adoption of open-source network technologies, and the shift from x86 to ARM-based devices. A prominent North American software company has engaged TCS to provide downsell prevention and churn mitigation services for end users on one of its flagship enterprise platforms.
TCS will implement a robust execution model across multiple regions, aiming to enhance platform adoption, deepen customer engagement, and minimize churn. These objectives will be achieved through the integration of AI-driven solutions and streamlined service delivery, ultimately improving the overall customer experience. CMI showed positive growth momentum this quarter, driven by clients seeking measurable ROI and automation, AI efficiency, ad monetization, and resilient IT. We are addressing these needs with outcome-based transformation, modernization operation, and embedding AI across processes. We are also actively leveraging strategic partnerships with hyperscalers like Microsoft, Google, and NVIDIA to accelerate AI capabilities to co-innovate with clients and deliver rapid solution builds that demonstrate business value. Energy resources and utilities posted strong growth this quarter. The ERU sector is rapidly moving towards a low-carbon future, making significant investments in renewable energy, electrification, and advanced storage solutions.
Companies are leveraging AI-driven platforms and providing workforce training to boost efficiency and adaptability. While the Americas and APAC and NAMI regions showed notable growth, the U.K. and Europe, despite a short period of slower progress, continue to prioritize clean energy initiatives and digital enhancements, supporting ongoing global development. The demand is robust for AI-led services. Growth markets remain resilient despite geopolitical challenges, with steady enterprise IT spending and increasing public sector investment in digital infrastructure. Revenue growth is led by the enterprise segment in India and strong public services momentum across India, APAC, and MEA, with broad-based service revenue gains. Public service continues to deliver standout wins. I will now talk about the fifth pillar of our strategy, which is AI ecosystem play. In Q3, we continue to establish ourselves deeply into the AI ecosystem.
During the quarter, we announced a $1 billion equity partnership with TPG, a leading global alternative asset management firm, to support the growth of our gigawatt-scale AI data center infrastructure build-up. We are making good progress in our discussion with prospective clients. On M&A, we announced the acquisition of Coastal Cloud in the U.S. to strengthen our Salesforce and AI consulting services. Together with PragmaEdge, we are now among the top five global Salesforce consultants, gaining over 500 experts and 3,400 certifications and boosting our CRM capabilities. These acquisitions also strengthen our capabilities in advisory, implementation, and managed services, providing a complete multi-cloud offering across all Salesforce modules. The acquisition also deepened our partnership with Salesforce through established partner board roles and summit partnerships and extended our reach into new market segments. The acquisition of Coastal Cloud is pending regulatory approval.
With this, I will now open the line for questions. Thank you.
Thank you very much. We will now begin the question and answer session. Participants who wish to ask a question may press star and one on the touch-tone phones. If you're using a speakerphone, please pick up your handset while asking a question. This is required to ensure optimum audio quality on the call. If you wish to remove yourself from the question queue, you may press star and two. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We'll take the first question from the line of Sudheer Guntupalli from Kotak Mahindra AMC . Please go ahead.
Hi, Krithi. Thanks for the opportunity. I'm just doubling down on your initial remark of the confidence of a good CY26. Maybe if you can contextualize the statement a bit more depth, it will be helpful.
Are you seeing any green shoots of improvement in discretionary or short-cycle projects that are giving you this confidence? Also, if we are to see a demand recovery in international markets in calendar 2026, which specific segments do you think should drive this?
Thanks, Sudheer . So in Q2, we had called out that the overall demand environment is improving compared to Q1. So in Q3, that trend continued. And Aarthi also mentioned we talked about the number of rapid build projects in AI we are doing. Essentially, these short-cycle projects are the decision-making is faster based on the ROI. We see a steady increase, and you can see that reflected in our AI revenue that we are reporting. And this is across all industry segments. AI and data are continuing to drive growth for us, Sudheer.
Gotcha.
And some of the key segments, like North America and U.K. across geographies, have either declined or were soft in this quarter. So seasonality and furloughs alone explain this, or is there any other issue along with the normal seasonality that might be playing out here?
It is primarily seasonality here, Sudheer.
All right, sir. Thank you, and all the very best.
Thank you.
Thank you. We'll take our next question from the line of Ravi Menon from Macquarie. Please go ahead.
Hi, thank you for the opportunity. Thank you for the question here. The first is this increase in other expenses within the SCNA. That's a very sharp increase here on the next about 27% and Q2 about 41%. Could you talk a bit about that? This is about INR 7.3 billion. And the first question is on the AI run rate. It's a strong number at INR 1.8 billion.
Could you talk a bit about whether this is preparing the customers' overall landscape for adopting AI, or are these really specific AI use cases, industry uses, which are you seeing more of?
So Ravi, first on the expenses part, the increase both sequentially and YOY is primarily on account of legal expenses, also leading from M&A-related ones, the legal fees, etc. Marketing initiatives have increased. A lot of our events, etc., converged into Q3, and also in terms of CSR initiatives.
Thank you.
Yeah. And
some of it's one-third.
Yes.
And Ravi, Aarthi here. So answer your question on AI. These AI revenues, like in the analyst day, we had reported INR 1.5 billion annualized, and this quarter, the number is INR 1.8 billion annualized. This includes primarily AI programs across the industry value chain, right, and the data efforts that are required to deliver those AI projects.
So this does not include, let's say that we are doing software engineering, we are using AI testing, we are using AI, those are not included. So primarily, two types of AI programs: AI for business transformation across industry value chains, across verticals. The second is when you use AI for modernization. Those are the two buckets I'll call out.
Thanks. Perfect. Thank you.
Thank you. Next question is from the line of Vibhor Singhal from Nuvama. Please go ahead.
Yeah. Hi. Thanks for taking my question. So I've got a couple of questions. One is, Krithivasan just wanted to, you mentioned that the weakness in the BFSI segment was quite seasonal in nature, and we had a good amount of deals in this quarter and the last quarter as well.
Going forward, let's say next few quarters, do we expect this growth momentum to reflect in the revenue growth as well for BFSI? And similarly, in the retail business, we've seen good pickup. Was the retail business kind of driven by the seasonality in this quarter, or do you see the growth momentum in the retail business also to sustain in the coming quarters? If you can just upload that, I have a follow-up for Sudhir.
Vibhor, I didn't get the last point, but in terms of BFSI, it's primarily seasonality that impacted us in this quarter. But the overall deal momentum that we are seeing and where the—if you say we're taking, excluding the seasonality, the growth we saw in the account gives us the confidence that BFSI will return to growth.
If you notice that before this quarter, also for the past few quarters, we had grown in BFSI, so we should return to growth, and that should continue. Retail, the seasonality is not the main reason. Again, in retail, we have started seeing growth across all sectors. While there are still some pockets of weakness in, like I called out, domestic airline is still a weakness, but international TTH is doing well. Essential in retail is doing well, but there is some softness in fashion and specialty. Accepting those pockets of weakness, we are generally seeing all-round pickup in CBG segment as well.
Got it. Got it. Great to hear that. Krithivasan, just one follow-up on that. We had mentioned that we are looking to report a higher growth in the developed markets this year.
I mean, do you think we can still achieve that in this year? And do you think this would also be the case going forward in FY27 over FY26?
Just on the developed markets. Yeah. We did tell in the past that our international market, we will continue; we will be delivering a higher growth. That now we have only one quarter left, but it continues to be our aspiration that we would make every effort. We see as a set; we saw demand slowly picking up in Q2 that continued in Q3. So we are making every step to ensure that we grow better than FY25 in FY26 on the international market.
Got it. Got it. Thanks a lot, Krithivasan. Just a couple of questions for Sudhir. So just two things. One is we had a very strong margin performance in this quarter.
Despite a two-month wage hike impact, we were able to report flat margins. Now, given that we have two, three quarters in which there will be no wage hike and no structural headwind per se, do you believe we are getting closer to that traditional band of 26%-28% margins in the coming quarters?
So if you look at it from a headwinds perspective, Vibhor, apart from the macro uncertainty, I think if you go back to last year, we had an annual intervention cycle coming in in Q4. That could be a headwind. Other than that, I think nothing major. And the investments which we have been making and calling it out. But irrespective of that, while we'll not shy away from making investments, we'll want to inch closer to our 26%-28% band, and we'll make all efforts to climb towards 26%.
That's great to hear, sir. Just one last from my side. Sir, on the labor law provision that we have taken, I know this is going to be an industry-wide practice. In fact, not just industry, I think all of us will be impacted in terms of corporates. Could you just tell me a bit about the nature of this expense? And is this—I mean, this is an exceptional item. From next quarter onwards, how will the labor laws' impact be taken care of in the entire period?
So based on the guidance overall on the new labor codes, the way they have been implemented, the guidance we have received, and factoring in some bit of restructuring, we have made an assessment and made a provision of INR 2,128 crores.
The nature of it, we have called out in our financial statements, gratuity amounts to about INR 1,800 crores, and leave liability balances INR 300 crores. This is all past service cost and hence called out as spun-off. On an ongoing basis, the impact of this, we expect it to be not very significant in the range of about 10 basis point- 15 basis points.
So going forward, next quarter onwards, we will just take the impact of this of around 10 basis point- 15 basis points above the normal operating margins. There will be no other exceptional items from Q4.
On the labor code, we don't expect, unless the rules give more clarity and there's something else which needs to be. Because currently, the rules came into effect and the guidance came towards the end of December.
We have made an assessment and done it, and we'll call it out if there is a change in the understanding of our rules.
Got it. Got it. Great. Thank you so much for taking my questions, and I wish you all the best.
Thank you. Next question is from the line of Nithin Padmanabhan from Investec. Please go ahead.
Yeah. Hi. Good evening and happy New Year. I had two questions. So one is the North American market has been maybe relatively soft over the last 12 quarters or so. You think with international coming back, you think North America will really start contributing, and we should start seeing this edging up from a growth perspective? The second is, do you think the restructuring costs are largely over? And then, sorry, I have two more.
So one is, and then the third one is, do you think we should see any revenue from BSNL this fiscal, or it just moves over? And just lastly, your thoughts on the recent development on credit card rates in the US? Do you think that in some form impacts your payment customers, and what could be the exposure there? Thank you. Yeah.
Nithin, I will take the question on North America, BSNL credit card, and then invite Sudhir to talk about the restructuring. In North America, like we discussed for the market in general, we find that the customers are willing to look at ROI-based decision-making in terms of new projects. And we also see the decision-making cycle has reduced compared to the past. And the momentum we saw in Q2 continued. So we are optimistic North America will return to better growth than before.
In terms of revenue from BSNL, we discussed the revenue that we recognize this quarter is very similar to the revenue that we got from BSNL last quarter. Unless the PO from the formal final PO is received, we don't expect the revenue pickup in BSNL, but we will keep you posted whenever it happens. On the credit card, there are both positives and negatives. While there could be some losses, the banks may suffer in terms of interest income, but it also ensures that there is no more spend happening because the interest rates are capped. I feel that it will have a two-way impact. There are certain industries that will benefit. Even in banking, the new spend can increase while the old spend interest could come down. It will have a very nuanced or probably multi-layered impact.
We have to wait and watch, but net-net, we don't see a major impact because of this particular rule that's come in. I'll now invite Sudhir to update you on the restructuring.
Thank you. Thank you, Vibhor. Hi, Nithin. So as I mentioned, we continue to hire and seek for top talent both from the lateral market and from the campuses as well. And while we are in that journey, what we had announced as part of the restructuring, we continue to look for support people with deployment into future roles. And wherever we are not finding success is where we're releasing. So we said we'll continue this exercise till the end of this year. And in this quarter as well, we released approximately 1,800 people with all the due care and compliance to all the laws of the land.
And as communicated earlier, we expect it to continue into the next quarter as well. But we are not really going after a number. It's purely a process, and we review it. And only if there is a genuine reason why we need to release is when we'll exercise that option.
Perfect. That's helpful. Thank you so much, and all the very best.
Thank you. Before we take the next question, we'd like to remind participants to ask a question. Please press star and one on your phone. Next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Hi. Good evening. Thank you for taking my question. My first question was that you spoke about that you are targeting to improve your international revenue this financial year.
Now, looking at your book-to-bill ratio, over the last two years, it has been in the range of 1.3-1.5 times. This year, it has been largely below 1.3. Are you comfortable that this level of order book can help you continue to see revenue growth improvement beyond fiscal 26 as well, or you would need to see an improvement in the deal runs?
So Kumar, if you look at this year, so far in the first three quarters, our order book is in the range of about $28-$29 billion. So if this trend continues, we'll be somewhere closer to about $38-$39 billion for the year, which will be one of the highest. And so we believe this order book will help us in growing in FY27 as well. We are now quite comfortable, Kumar, with the order book itself.
As I said, as far as international revenue in Q4 is concerned, we are optimistic and will take every step that's required to see we reach the aspiration of having a revenue better than FY25.
Thanks, Vibhor, for that. My second question was on the AI services revenue, which you spoke about is growing pretty strongly on a quarter-over basis. Can you give some more color on what is driving that growth? And you also spoke about that agentic AI implementation is progressing cautiously. Why is it so?
I think, Kumar, if you look at the AI revenues, the growth is coming from across verticals, and these are business-impacting programs that we are delivering for our customers. And if you really look at it, I think GenAI is something we all started talking about sometime late 2022 and early 2023.
So for about one, one and a half years until about mid-2024, there was a lot of experimentation, POCs, and people were understanding the power of the technology. But if you really look at 2025, I think the adoption in our customer landscape has significantly increased, where we have now shifted from experiments, POCs, and pilots to really ROI-led scaled implementations. And that's what is driving this growth. And agentic AI getting introduced early in 2025 really also created good momentum because traditional AI, generative AI, and agentic AI, the combination is what is helping us deliver solutions that create value for our customers.
Got it. Thanks. Just one clarification on the legal and the expense increase which you called out. What all would be one-time in nature in that? I would assume that legal expenses wouldn't recur from the next quarter onwards.
So if you will be able to quantify within that?
The legal expenses are the combination of some ongoing elements also. And the legal fees related for the legal case would have been one-time. It would be higher splitting calling it out. But you would expect some other one-offs carrying into the CSR provisions, etc., might continue into the next period.
So essentially, the legal expense in this quarter largely would be an ongoing expense. Is that a fair way to say that?
Partly, it's a mix of both, but I'm not going to higher split into how much it is. You could say about 10-20 basis points is one-time.
Got it. Thanks a lot.
Thank you. Next question is from the line of Bachman from BMO. Please go ahead.
Yes. Thank you very much.
I was hoping you could talk about what the changes in economics on renewals is today or currently versus, say, two years ago. And what I wanted to understand is, at the time of renewal, what's the price difference on the like-for-like work at the time of renewal, and how much more are you incrementally focused on selling incremental services to offset the price declines that I think are largely driven by the benefits of AI? But if you could just speak to, broadly, what renewals look like today versus, say, two years ago or three years ago. Thank you.
Bachman, if you look at the renewal, most of the renewals would bake in some productivity. But that is business as usual. That is, I don't think related to AI here and without AI coming into the picture. Most of the renewals will have some productivity baked in.
It could vary in the range of 10%-15% for a term or the contract. But also, we have seen every time a renewal happens, it increases the scope of operation that we do. So net-net, you'll find very often when the renewal happens, the top line or the total quantum of the revenue doesn't decrease, but the quantum of work that we commit to deliver to the customer, that increases offsetting the top line. The realization, I'm sorry, and because the productivity is achieved by TCS, you don't see a hidden realization, but the quantum or the amount of work we deliver increases. Now, with AI coming in, our approach has always been that we proactively go to customer even before the start of the renewal cycle. We go to customer with opportunities to deploy AI and how we can achieve a certain amount of productivity through AI.
The discussions, so once we renew it, at the time of renewal, it embeds AI productivity and very often, as I said, increases the scope of work as well. So was your contention that that 10%-15%, you're suggesting that same was what the renewals, the price discounts at time of renewal, that's what it was two, three years ago? You're saying that's a consistent number? It could vary. I said that gave it as an example. But the point I'm trying to make is there is a productivity, but there is a volume of work that is being delivered that also increases. So by and large, the total value of the contract doesn't change or reduce much, but we end up delivering more volume of work, but with a higher productivity.
Okay. And then the second question I had was similar.
As you're bidding for net new work and you're bidding in cost benefits or supply the benefits, if you will, is there more variance allowed in the contracts? What I mean by that is, are you structuring the contracts differently in that you allow for, if the cost curves are better, then you allow for some sharing with the clients. If the benefits that you predicted in the contracts aren't as good, then the client shares back with you. Is there more flexibility because you're adopting new technology as you're bidding out multi-year contracts? Thank you
and we have been quite open to that, but at the same time, at this time, it's fair to say most contracts assume a fairly aggressive AI productivity to come in and bake in the expected productivity at the beginning of the contract itself.
But we would be quite open to work with our customers where later on, if we are able to get or achieve a greater productivity, if we have to share it, we would be quite open. But to be fair, we have not seen the type of contract where flexibility is built in within the contract. Most contracts assume a certain productivity over a period of time, and they are priced accordingly.
Okay. All right. That's it for me. Anything else?
Thank you. Next question is from the line of Dhanashree from Choice Institutional Equities. Please go ahead.
Yeah. Thanks for taking my question. As you have already called out AI revenues, $1.8 billion.
If you can give some more color in terms of how our pipeline is led by AI, what is the growth in the last nine months in this pipeline, and some color to this growth that we see going ahead? Dhanashree, like we said, we are seeing increased momentum quarter on quarter. In Q3, it is the first time we started publishing our annualized AI revenues. As I said, in mid-December, this number was $1.5 billion annualized, and quarter closure is $1.8 billion. We are seeing increased traction, good momentum across our client base. We expect AI revenues to continue to grow with a strong growth rate. Some color on data center operations, when the actual operations will start figuring in the numbers and all, if some cues on the timeline, that would be helpful.
Dhanashree, what we had called out is that we would be first announcing an anchor customer and basis the requirements of the anchor customer going to do the build-out. Typically, build-out would require about 18 months post which revenue should start picking in.
Thank you. Thanks. That's it from me.
Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to management for closing comments. Over to you.
Thank you, Operator. In summary, the growth momentum we witnessed in Q2 FY26 continued in Q3 FY26. In Q3, our revenue grew 0.8% sequentially in constant currency with an operating margin of 25.2% at a net margin of 20%. Our AI services grew, now generate $1.8 billion in an annualized revenue and is growing at 17.3% quarter on quarter in constant currency.
Our TCV was strong at $9.3 billion, including a mega deal win. I would like to conclude by reiterating that we remain steadfast in our ambition to become the world's largest AI-led technology services company guided by a comprehensive five-pillar strategy and with investments in becoming a full-stack AI services player across infrastructure to industry. These coupled with enduring partnerships and disciplined execution position us uniquely to gain leadership in AI. With that, we wrap up our call today. Thank you all for joining.
Thank you, members of the management. On behalf of TCS, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.