BENGALURU (Oct 9): Shares of Tata Consultancy Services rose on Friday after reporting steady margins despite ramping up artificial intelligence investments, boosting confidence it can preserve profitability amid weak demand.

The stock rose as much as 6.2% to 2,204 rupees, trimming its year-to-date decline to 30.3%

AI is disrupting India's US$315-billion software services sector by undermining its billable hour business model, but is also creating new demand as clients buy services built on the technology. Companies are ramping up investments to capture this emerging demand and cushion the hit to their core business.

"The sector is currently facing the AI deflation impact," said Rishubh Vasa, research analyst at Indsec Securities. "If your margins are held steady, it's a positive thing."

Vasa added that if AI-related pressures ease and profitability improves from current levels, "then it becomes a re-rating case."

The software services firm, which kicked off earnings for the Indian IT sector, saw its operating margin remain flat sequentially at 24%.

The company's results reinforced expectations that the IT sector is navigating the shift to artificial intelligence better than feared.

Vasa said firms that preserve margins through the AI transition could see valuation upgrades as AI-led spending deepens across client projects.

TCS is part of the salt-to-software Tata Group, which is at the centre of a dispute over control of holding company Tata Sons and whether it should go public.

Morningstar analysts said they see "a clear path to further scale AI revenue" at TCS, whose annualised AI revenue jumped nearly 20% quarter-on-quarter to US$3.1 billion.

The investment research firm, however, reduced its fair value estimate to 2,360 rupees from 2,400 rupees to reflect a higher possibility of extended slowdown across consumer clients due to macro volatility.

Analysts, on average, rate the stock "buy" with a median price target of 2,387.50 rupees, according to LSEG-compiled data.

The company's earnings come amid the US government's suspension of TCS and several other technology firms from the Permanent Labor Certification (PERM) programme.

TCS said it does not expect the suspension to have any material impact on its workforce strategy or client engagements.

TCS's gains came amid a broader rally in the Nifty IT Index, which rose as much as 3.1% on the day.

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