Tata Consultancy Services Limited (TCS.NS) Q3 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the TCS Earnings Conference Call. [Operator Instructions] 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' financial results for the third quarter of fiscal year FY 2026 that ended on December 31, 2025. This call is being webcast through our website and archived including the transcript, will be available on the site for the duration of this quarter. The financial statements, 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.

And 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 construed as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces. We have outlined these risks in the second slide of the quarterly fact sheet, available on our website. And e-mailed 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 '26 continued in this quarter. In Q3, we delivered INR 67,087 crores 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 technology software and services did well, adjusted for seasonality. Amongst major markets, Europe continued to do well, while North America was flattish. Regional markets continue to deliver strong growth. All next-gen service lines continues to grow well sequentially. Most client segment showed improvement. On an LTM basis, this quarter, we gained 2 additional clients generating more than $100 million in revenue, 8 clients exceeding $20 million and 23 clients bringing in over $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 AI full stack -- 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, Krithi. Good day, everyone. Just rehighlighting the revenue numbers, it's INR 67,987 crores (sic) [ INR 67,087 crores ] that's a Q-o-Q 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 a 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 core. 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 USD 1.6 billion, which is 130.4% of net income. Free 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 INR 11 per share and a special dividend of INR 46 per share. I'd like -- 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 ambition. 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 in compassing 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 $1.8 billion with 17.3% billion 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 Builds 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 transformation. First one is our own internal transformation, codenamed TCS to the Power AI. In Q3, we continue 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 hackathon, the in-person immersive format has created significant engagement and buzz among our employees. It has enabled them to explore and develop their talent 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 + AI' services autonomy model. This includes 5 levels of autonomy from using AI as a tool at Level 1 to building an agentic enterprise at Level 5. 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 which clearly defined goals and outcomes. For example, for a global insurer, we improved software engineering practices from Level 2 autonomy to Level 3 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 3x more rapid base that we delivered for our customers this quarter. We set up 2 AI labs in India, 1 for a leading U.S. insurer to scale agency transformation across insurance value chain and software engineering and another for a regional U.S. bank for agent AI-led operations in KYC and AML investigations. These labs are helping our customers incubate and create a strong pipeline for AI Rapid [ bridge ]. We also delivered several high-impact AI implementation 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 intervention, 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 container 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 FY '26, our global head count stands at 582,163 with associates from 149 nationalities and 35.1 percentage 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 plus 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 Builds engineers and leads, which are increasingly vital for the future. We're currently working on aligning our role framework with AI as a 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 NextGen 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 comprehensive AI ecosystem system of learning and [ hamper ] hands-on assessment platforms. As part of our pioneering Industry Academy collaboration, we are actively involved in designing of industry-relevant curriculum [Technical Difficulty].

I'm sorry, sir. You are not audible. Hello, Sir. We are unable to hear you. Ladies and gentlemen, sorry for this, we have the boardroom team connected. Sir, please go ahead. .

Sorry, we understand we got disconnected. So exactly not sure where we got dropped, but I just -- our understanding will just start from where I feel we got dropped. So I was talking about the second pillar. The second aspect of our talent transformation is role evolution. AI is creating new roles such as Rapid Builds engineers and leads, which are increasingly vital for the future. We are currently working on aligning our role framework with AI at this centerpiece. All components of this frameworks 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 data and positioning them closer to customers. Over 50% of our experienced hires are coming with NextGen skill set. 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 via ecosystem of learning hands-on assessment platforms. As part of our pioneering industry academy collaboration, we are actively involved in designing of industry-ready curriculum. TCS APEX 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 #1 in Everest Group PEAK Matrix for Talent Readiness for next-generation data analytics and AI services, featured on Forbes America's best employers for Engineers 2026. Ranked #1 technology services firm globally in Newsweek's Magazine 2026 ranking of America's most reliable companies. I would now like to invite you back, Krithi.

Thank you, Sudeep. Let me now share more details on the performance across the industry verticals. BFSI continues to show growth -- 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 Q-on-Q. This includes one mega deal in BFSI in North America. This comes on the back of a mega deal that we had announced in the previous quarter as well. The excluding the mega deal BFSI TCV in pipeline continues 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 the 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, digital enhancements. The payment sector is experiencing rapid transformation, driven by regionalization and whereas capital markets and asset management sector maintained strong performance. Modernization initiatives are being prioritized with BFSI clients. The insurance industry is adapting to new source 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. The shortened core turnaround time from weeks to hours with improved accuracy. For a Finnish insurance company, and AI driven quality assurance framework was delivered, reducing manual testing efforts by 70%. TCS successfully launched 3 large-scale core-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. Consumer Business Group, sorry -- 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. Retail is focused on value-driven strategies, digital engagement and AI for 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 remain 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. Majority of licenses companies have adopted or piloted generative AI. Especially for drug discovery and automating literacy reviews. Investments in digital health tools, telemedicine, wearables and remote patient monitoring are surging -- for surging. AI enhanced diagnostic tools, such as radiology AI and rapid pathogen detection systems or 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. In manufacturing posted marginal growth in Q3, while the automotive sector remains subdued, other industries demonstrated growth momentum during the face of seasonal challenges. Investment in smart manufacturing persists as both Agentic and physical 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, enhanced 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 multiyear engagement, TCS will operationalize ABB's future hosting model, the 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 shift from x86 to AI ARM-based devices. The prominent North American software company has engaged TCS to provide downsell prevention and churn mitigation services for end users on one of its flagship interface 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. CMA showed positive growth momentum this quarter, driven by clients taking measurable ROI and automation AI efficiency, add monetization 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 to demonstrate business value. Energy Resources & Utilities posted strong growth this quarter. The ERU sector is rapidly moving towards a low-carbon future, making significant investments in renewable energy, electrification advanced storage solutions. Companies are leveraging AI-driven platforms and providing workforce training to boost efficiency, and adaptability. While the Americas, APAC and many regions showed notable growth. U.K. and Europe, despite a short period of slowed 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 EMEA 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 also deeply into AI ecosystem. During the quarter, we announced a $1 billion equity partnership with CPG, a leading global alternative asset management firm to support the growth of our gigawatt scale AI data center infrastructure buildout. We are making good progress in our discussion with prospective clients. On M&A, we announced acquisition of Coastal Cloud in the U.S. to strengthen our Salesforce and AI consulting services. Together with listing which we are now among the top 5 global Salesforce consultants, gaining over 500 experts and 3400 certifications and boosting our CRM capabilities. These acquisitions also strengthened our capabilities in advisory, implementation and managed services, providing a complete multi-cloud offering across all Salesforce models. The acquisition also deepened our partnership with Salesforce to establish partner Board roles and Summit partnerships and extend our reach into new market segments. The acquisition of Coastal Cloud is pending regulatory approval. With this, I'll now open the line for questions. Thank you.

[Operator Instructions] We take our first question from the line of Sudheer Guntupalli from Kotak Mahindra AMC.

I'm just doubling down on your initial remark of the confidence of the group CY '26. Maybe if you can contextualize the statement in a bit more depth, it will be helpful. Are you seeing any green shoots of improvement in discretionary or short-cycle projects that is giving you this confidence? Or also, if we have to see a demand recovery in international markets in calendar '26, 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 continues. And Aarthi also mentioned we talked about a number of Rapid Builds projects in AI we are doing. Essentially the short-cycle projects, 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.

Sure, sir. 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 going out here?

It is primarily seasonality here, Sudheer.

We'll take our next question from the line of Ravi Menon from Macquarie.

The first is those increase in other expenses within the SG&A. There's a very sharp increase or it's about [ 77% ] and QoQ about 14%. 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, $1.8 billion. Can you talk a bit about whether this is preparing the customers' overall landscape for adopting AI? Or are these really specific AI use cases industries? Which are you seeing more of?

So Ravi, first on the other 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, et cetera. Marketing initiatives has increased. A lot of our events, et cetera, converged into Q3 and also in terms of CSR initiatives.

So some of this will be [indiscernible].

Yes.

And Ravi, Aarthi here, to answer your question on AI. These AI revenues, like in the Analyst Day, we had reported $1.5 billion annualized, and this quarter, the number is $1.8 billion annualized. This includes primarily AI programs across industry value chain, right? And the data efforts that are required to deliver those AI projects. So this does not -- 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 2 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 2 buckets I'll call.

Next question is from the line of Vibhor Singhal from Nuvama.

So I got a couple of questions. One is Krithi just wanted to -- you mentioned that the weakness in the BFSI segment was quite seasonal in nature. And we had a good amount of business in this quarter in the last quarter as well. So going forward, let's say, next few quarters, do we expect this growth momentum to reflect in the revenue growth itself 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? After that I have a follow-up question.

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 the where 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. And 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 weakness, but international TTH is doing well. Essential and retail is doing well, but there are some softness in fashion and specialty. So accepting those pockets of the weakness, we are generally seeing all around pickup in CPG segment as well.

Got it. Got it. Great to hear that. So Krithi just one follow-up on that. So 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 FY '27 over FY '26? Just on the developed markets.

Yes, We were like -- we did tell you in the past that our international market, we will continue, we will be delivering a higher growth. That now we have only 1 quarter left, but it continues to be our aspiration that we would make every effort. We see, as I said, like we saw demand slowly picking up in Q2 that continued in Q3. So we are making every steps to ensure that we do -- we grow better than FY '25 in FY '26 in the international market.

Got it. Just a couple of questions, for Samir. Sir, just 2 things. One is we had a very strong margin performance in this quarter despite the 2-month wage hike impact, we were able to report flat margins. Now given that we have 2, 3 quarters in which there will be no wage hike and no structural headwind per se, do you believe we are getting closer to that aspirational [ band ] of 26% to 28% margins in the coming quarters?

So if you look at it from a headwind 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 will not shy away from making investments, we want to inch closer to our 26% to 28% band and we'll make all efforts to climb towards 26.

That's great to hear sir. Just last one 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 bit about the nature of this expense? And is this -- I mean this is an exceptional item. From next quarter onwards, how does the labor laws impact will be taken care of in the entire P&L?

So basis, 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 fee structuring, 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 is balance INR 300 crores. This is all past service costs and hence called a spun-off. On an ongoing basis, the impact of this we expect it to be not very significant in the range of about 10 to 15 basis points.

So going forward, next quarter onwards, we will just take the impact of this of around 10 to 15 basis points above the EBITDA in our 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 is 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 we done it. And we'll call it out if there is a change in the understanding of our rules.

Next question is from the line of Nitin Padmanabhan from Investec.

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 U.S., do you think that in some form, impacts your payment customers? And what could be the exposure there?

Nitin, I will take the question on North America, BSNL, Credit card and then invite Sudeep to talk about the restructuring. In North America, like we discussed for general -- in 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. And in terms of revenue from BSNL, we have -- as we've discussed, the revenue that we recognized this quarter is really similar to the revenue that we got from BSNL last quarter. And unless the PO from the -- formal final PO is [indiscernible] 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, like while there could be some losses the banks may suffer in terms of interest income but it can also -- it also ensured that there is more spend happening because the interest rates are up. So I feel that it have -- it will have 2-way. There are certain industries will benefit even in banking, the new spend can increase while the whole spend interest could come down. So it will have a very nuance or probably multilayered impact. We have to wait and watch. But on net-net, we don't see a major impact because of this particular rule that's come in. I'll now invite Sudeep to update you on the restructuring.

Thank you, Nitin. So as I mentioned, we continue to hire and seek for top talent, both from the latter 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 role. And wherever we are not finding success is we are releasing. So we said we will continue this exercise till the end of this year. And in this year, as the quarter as well, we released approximately 1,800 people with all the due care and compliance to all the laws of the land. And we, as committed 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 then we'll exercise that option.

[Operator Instructions] Next question is from the line of Kumar Rakesh from BNP Paribas.

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 to 1.5x. 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 wins?

So Kumar, if you look at this year, so far in the first 3 quarters, our order book is in the range of about $28 billion to $29 billion. So if this continues, we will be somewhere closer to about $38 billion, $39 billion for the year, which will be 1 of the highest. And so we believe this order book will help us in growing like it is in FY '27 as well. We are quite comfortable now with the order book itself. And I think as far as Q4 -- international revenue in Q4 is concerned. We are optimistic, and we'll take every step that's required to see we reach the aspiration of having a revenue better than FY '25.

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 that 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. So -- and if you really look at it, I think when GenAI is something we all started talking about sometime late towards 2022 and early 2023. So for about 1, 1.5 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 experiment POCs and pilots to really ROI-led scale 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. Samir just one clarification on the SG&A expense increase, which you called out. What all would be onetime 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 as a combination of some ongoing elements also. And the legal fees related for the legal case would have been one time. It's -- it would be high splitting, calling it out, some of -- but you would expect some other one-offs carrying into like the CSR provisions, et cetera, might continue into the next period.

So essentially, the SG&A 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 have split into how much it is. You could say about 10 to 20 basis points is one point -- one time.

Next question is from the line of Bachman from BMO.

Yes. I was hoping you could talk about what's 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 what 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, 2 years ago or 3 years ago.

Bachman, if you look at the renewal, most of the renewals would bake in some productivity. But that is business as usual, I don't think, related to AI, even without AI coming to picture, most of the renewals, which have some productivity baked in. It could weigh in the range of 10%, 15% for a term of a contract. But also we have seen every time of 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 revenue doesn't decrease, but the quantum of work that we commit to deliver to our customer, that increases, offsetting the top line, the realization -- I'm sorry, because -- and because the productivity is achieved by TCS, you don't see a hit in 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 customers even before the start of the renewal cycle. We go to customers with opportunities to deploy AI and how we can achieve a certain amount of productivity through AI and the discussions. So once we renew it, at the time of renewal, it embeds AI productivity. I'm very often, as I said, increases the scope of work as well.

And so as your contention that 10% to 15%, you're suggesting that's the same what the renewals -- the price discounts at time of the renewal, that's where it was 2, 3 years ago. You're saying that's a consistent number?

It's -- it could vary. It's not -- as I said, I give 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 it's 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 than the client shared back with you. Is there more flexibility because you're adopting new technology as you're bidding out multiyear contracts?

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 baking the expected productivity at the beginning of the contract itself. But we would be quite open to work with our customers where new later on if we are able to get or achieve greater productivity. If you have to share it, we would be quite open. But to be fair, we are not seeing 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.

Next question is from the line of Dhanashri from Choice Institution Equities.

As you have already called out AI revenues of $1.8 billion, so if you can give some more color in terms of how our pipeline is led by AI? What is the growth in last 9 months in this pipeline? And some color to this growth that we see going ahead?

So Dhanashri, like we said, we are seeing increased momentum quarter-on-quarter. And in Q3, it's the first time we started publishing our annualized AI revenues. As I said earlier, in mid-December, this number was $1.5 billion annualized and quarter closure is $1.8 billion. So we are seeing increased traction, good momentum across our client base. And we expect AI revenues to continue to grow with a strong growth rate.

And some color on data center operations, where -- when the actual operations will start figuring the numbers and all, if some queues on the timeline, that would be helpful.

Dhanashri, 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 kicking in.

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 FY '26 continued in Q3 FY '26. In Q3, our revenue grew 0.8% sequentially in the constant currency and operating margin of 25.2% at a net margin of 20%. Our AI services group now generate USD 1.8 billion in an annualized revenue and is growing at 17.3% quarter-on-quarter in constant currency. Our TCV was strong at USD 9.3 billion, including a mega deal win. I'd 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 under the investments in becoming a full stack AI services player across infrastructure [indiscernible]. This coupled with enduring partnerships, and this has been an execution position us uniquely to gain leadership in AI. With that, we wrap up our call today. Thank you all for joining. Thank you.

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.