TCS: Status quo on demand

15 Feb 2024 , 01:09 PM

Analysts of IIFL Capital Services hosted TCS’ management at IIFL’s Investor Conference in Mumbai. TCS remains optimistic about the medium-term growth prospects given the long runway for cloud migration and the large GenAI opportunity. However, in the near-term, discretionary spends by clients remain soft. TCS continues to see traction in deals around operating model transformation, vendor consolidation and cost take outs. GenAI is a conversation starter at every client conversation, but deal sizes are currently small. At a portfolio level, TCS is confident of maintaining and then expanding current margins. Analysts of IIFL Capital Services maintain ADD rating on the stock and believe the 20% premium to INFO on FY26 P/E leaves little room for further rerating. Analysts of IIFL Capital Services 12-month TP is pegged at 25x 2YF EPS, as they forecast 9%/12% USD cc revenue/EPS Cagr over FY24-26.

Key verticals have likely bottomed, but pickup to be gradual: 

Management indicated that its key verticals – BFSI and Retail have likely bottomed out, but they are unlikely to see a sharp recovery in the nearterm. Management believes BFSI is one of the first few verticals that is likely to see a pickup in discretionary spend, while TMT likely to be a laggard in the current cycle. Overall TCS is confident of FY25 growth being much better than FY24, although the quantum will need to be seen.

Confident of maintaining and expanding margins: 

TCS highlighted that it continues to have levers around productivity improvement, improving utilization and rationalizing sub-contractor costs, which should more than offset any headwinds from ramp up large deals like BSNL. Wage hikes are likely to be rolled out from Apr and be linked to inflation. Overall TCS is confident of maintaining or improving margins from current levels. TCS continues to add freshers, while lateral hiring would depend on the demand environment.

Deal wins and pipeline healthy:

TCS has won deals on USD29.5bn TCV in 9MFY2w4, up 22% YoY and the conversion of these deals to revenue has been as per expectations. Despite such strong deal wins, its deal pipeline has continued to expand. TCS is working on multiple PoCs with its clients on GenAI and believe the opportunity around streamlining the data of enterprises would be one of the early opportunities before GenAI scales.