TCS Records Steady performance; Macro Uncertainty Weighs On Growth Visibility

TCS noted a tad better than expected operating performance in Q1. Revenue grew 1.9% QoQ (2.2% CC) to USD7.51bn, slightly surpassing expectations and largely backed by higher than estimated revenue contribution from the BSNL deal (almost half of incremental revenue QoQ). EBITM fell by 130bps QoQ to 24.7% due to wage hike. Deal wins moderated sequentially owing to timing of deal closures, but remained healthy at USD8.3bn (book-to-bill: 1.1x) and well within the management’s guided comfortable range of USD7-9bn per quarter. Despite broad-based revenue growth, healthy deal wins, and strong pipeline, the Mgmt refrained from commenting on growth sustainability, considering the near-term demand volatility caused by weakness in discretionary spending and unabated pressure from the sudden pause/deferment of projects by clients amid macro uncertainty. The management reiterated FY25 revenue growth being better than that in FY24. We largely retain FY24-27E earnings and our REDUCE on TCS, as well as TP of Rs3,950/share at 25x Jun-25E EPS.

Results Summary

Revenue grew 1.9% QoQ (2.2% QoQ/4.4% YoY CC) to USD7.51bn, a tad above our estimate of USD7.48bn. Cost of equipment and software licenses rose by USD70mn QoQ, partly reflecting ramp up of the BSNL deal. EBITM fell by 130bps QoQ to 24.7%, ahead of our estimate of 24.5%. EBITM was impacted (-170bps) by wage hike and higher third-party costs and partially offset by operating efficiencies including better productivity, higher utilization, and lower subcontracting costs. Among geographies, North America, UK, and Continental Europe grew 0.9%, 2.5%, and 0.5% QoQ (in USD terms). BFSI, Manufacturing, Life Sciences & Healthcare, Technology & Services, Regional Markets & Others, and ERU grew 0.6%, 1.9%, 2.9%, 0.7%, 10.6%, and 1.9% QoQ respectively. Consumer segment saw flat growth, whereas Communications & Media declined 4.2%. Headcount grew 0.9% QoQ (on-boarded 11,000 freshers), after three straight quarters of decline. The company announced an interim dividend of Rs10/share. What we liked: Steady operating performance, broad-based growth with almost all verticals reporting sequential growth. What we did not like: Weak cash conversion (67% OCF/EBITDA).

Earnings Call KTAs

i) TCS continued to witness the dichotomy that it has being seeing in the past 6 quarters. While larger and strategic transformation programs with enterprise-wide scope continued apace, some smaller programs with narrower scope benefits are being scrutinized more stringently, and hence tend to get deprioritized. TCS is seeing clients prioritize spend on initiatives oriented towards cost optimization which offer an immediate ROI. ii) BFSI saw return of QoQ growth. Clients are attempting to balance their priority between transformation and cost optimization projects. iii) Consumer segment saw QoQ growth, led by demand for cost optimization, operating model transformation, and vendor consolidation programs. Consumer confidence improvement and moderation in inflation are likely to drive a demand uptick. iv) CME continues to face growth headwinds. Interest rate cuts may be a trigger for higher spending by clients. v) TCS rolled out double-digit wage hikes for top-performing employees; average salary hike for employees is 4.5-7% wef Apr-24. vi) Revenue growth was led by AI Cloud, Cyber Security, and Enterprise Solutions. vii) In Q1, >270 AI/GenAI engagements have been deployed or are in various stages of progress. The AI/GenAI pipeline has almost doubled QoQ to USD1.5bn. viii) Near-term margin levers are pyramid rationalization, improved productivity, and better utilization, whereas pricing and growth acceleration would assist in the medium term.