TCS: Q4FY25: Muted; Macro Uncertainty To Weigh On Predictability

Information Technology   

Result Update       

April 11, 2025

ADD

CMP (Rs): 3,247 | TP (Rs): 3,500

TCS’s Q4FY25 operating performance was weaker than our estimate. Revenue declined 1.1% QoQ (-0.8% cc), slightly below our estimate due to some project deferrals amid elevated uncertainty in the later part of Q4. The management indicated that it expected over 1% growth in international markets in Q4, though it reported ~0.6% growth due to aforementioned factors. EBITM declined by 30bps to 24.2%, lower than estimate. In the absence of mega deals, deal TCV was impressive at USD12.2bn in Q4 (book-to-bill: ~1.6x). Considering the elevated macro and geopolitical uncertainty, the management changed its commentary on demand recovery, particularly on discretionary spending. TCS has seen instances of delays in decision-making and discretionary spend come under heightened scrutiny and pressure recently. We trim our estimates by 1.8-3%, factoring in the Q4 miss and tariff uncertainty. TCS is well positioned to benefit from its investments in AI and digital capabilities, along with scale and customer contextual knowledge over the medium term; however, macro uncertainties are likely to weigh on near-term growth predictability. We retain ADD while cutting our TP by ~10% to Rs3,500 at 23x Mar-27E EPS (25x earlier).

Results Summary

Revenue dipped 1.0% QoQ (-0.8% QoQ cc) to USD7.47bn. EBITM fell by 30bps QoQ to 24.2%, short of our estimate of 25.0%. Margin decline was due to tactical interventions (-100bps) driven by promotions wef Jan, strategic marketing, CSR and travel (-60bps), offset by currency gains (+40bps) and operating efficiencies. Among geographies, North America, UK, Continental Europe, and APAC saw growth of 0.1%, 0.2%, 1.9%, and 2.8% QoQ, respectively (in USD terms), while India saw a decline of 15.1% QoQ. Revenue decline in India is largely owing to ramp down in the BSNL deal, (initial contract expected to end in Q1). Headcount grew 0.1% QoQ to 607,979. Attrition inched up, to 13.3% from 13% in Q3FY25. The company has announced a final dividend of Rs30/sh. What we liked: Strong deal intake, BFSI resilience. What we did not like: EBITM miss.

Earnings Call KTAs

1) Softness in Q4 was partially due to some project deferrals and delayed decision making due to tariff uncertainty. 2) TCS announces appointment of Aarthi Subramanian as President and COO, and Mangesh Sathe as CSO with effect from 1-May-25. 3) BFS spending remains steady on the back of tech modernization, cost optimization, vendor consolidation, and regulatory initiatives, while softness persists in Insurance. 4) In LS&H, client-specific challenges called out earlier are largely behind. However, in healthcare, deals are taking longer to close, customers are moving cautiously and prioritizing critical business initiatives. 5) Consumer remains under pressure due to decline in sentiment, while Communications is facing industry-wide challenges. 6) Manufacturing remains affected due to uncertainty in the auto industry. 7) ERU has good opportunities and continues to perform well. 8) FY26 margins are expected to be better than in FY25 on the back of business mix, pyramid rationalization, improved productivity, and better utilization. 9) Wage hike for FY26 will be decided later, based on market environment.