Tata Consultancy Services; Weak Operating Performance; Deal; Intake Remains Healthy

HOLD

CMP: Rs3242 

Target Price: Rs3300

TCS delivered a weak operating performance in Q4, due to softness in discretionary spending and deferment of non-critical new projects. Revenue grew 1.7% QoQ to USD7.19bn (0.6% CC QoQ), amid a challenging operating environment as clients turned cautious, pausing discretionary projects and deferring non-critical ones. North America played-out weaker than expected in Q4 and, against the anticipation of a recovery, actually weakened further (-0.7% QoQ CC). Growth momentum sustained in the UK in Q4, while growth further moderated in Continental Europe. Weak revenue growth led to a miss in Company’s exit EBITM guidance of 25%. Overall deal intake in Q4 was broad-based and healthy, at TCV of USD10bn (book-to-bill at ~1.4x). Improvement in sentiment across Europe led to better velocity of deal closures in Q4. Management remains watchful in the near term, considering the heightened macro uncertainties; however, it reiterated confidence on accelerating revenue growth, once uncertainties abate. We tweak our earnings estimates for FY24-25 (a 0-1.5% cut) post the FY23 performance. We retain HOLD with TP of Rs3,300/share at 22x Mar-25E EPS.

Results summary: Revenue grew 1.7% QoQ to USD7.19bn (0.6%/10.7% QoQ/YoY CC), below our estimate of USD7.24bn. EBITM was flat QoQ at 24.5%, missing Mgmt guidance of exiting the year at 25%, due to weaker-than-expected revenue growth. For the full year, EBITM declined by ~120bps due to annual wage hikes (-160bps), impact of supply-side pressures (-140bps), and higher travel costs (-30bps) that were partly offset by realization improvement (+50bps), pyramid optimization (+50ps), and currency movement (+110bps). Net Profit stood at Rs113.9bn, lower than our estimate of Rs116.4bn on account of miss on the operating performance front. Revenue growth in Q4 on CC YoY basis was led by Retail & CPG (13.0%), Life Sciences & Healthcare (12.3%), Technology & Services (9.2%), Manufacturing (9.1%), BFSI (9.1%), and Communication & Media (5.3%). What we liked: Healthy deal intake (TCV of USD10bn; book-to-bill of ~1.4x), moderation in attrition (20.1% vs 21.3% QoQ). What we did not like: Miss on operating performance.

Earnings call KTAs: 1) Cloud, Cyber Security, Enterprise Application Services, and Cognitive Business Operations led the growth in Q4. 2) Management highlighted that clients are recalibrating spends, prioritizing cost optimization projects, investing in automation initiatives, and consolidating vendors amid a challenging environment. 3) Deal TCV for BFSI stood at USD3.1bn, Retail & CPG TCV stood at USD1.3bn, and North America TCV at USD5.0bn in Q4FY23. 4) TCS onboarded over 44K freshers in FY23. It has made offers to 46K freshers so far for FY24. 5) TCS has ~116K hyperscaler cloud certifications, which place it among the top-2 partners. 6) IT Services attrition on an LTM basis continued to trend down and was at 20.1% in Q4. Management indicated that quarterly annualized attrition moderated by ~4% QoQ and by ~10% from the peak. 7) Management highlighted that a cautious sentiment by clients weighed on demand, particularly in the US. The travel vertical continues to perform well. BFSI, Manufacturing (particularly for process and industrial), Discretionary retail and fashion retail in the US remain weak. Weakness in Communication & Media was largely attributed to softness in the Information and Media segments. 8) K. Krithivasan will take over as the CEO & MD of the company w.e.f June 1, 2023, for a period of 5 years.