Q1FY24 Review: Tata Consultancy Services: Strong TCV comforting, status quo on demand

13 Jul 2023 , 10:13 AM

Tata Consultancy Services (TCS) reported revenue growth of 7% cc YoY (0.1% sequential) in Q1, in line with IIFL estimate as BFSI, TMT and US remained weak. EBIT margins at 23.2% (-130 basis points sequential) were also in line with IIFL estimate, compressing due to annual wage hikes but were flat YoY. Deal wins were strong at USD10.2 billion (+24% YoY, 1.4X book-to-bill), with potentially higher ACV giving visibility for growth in FY24. TCS commented that the near-term demand environment remains cautious with clients prioritizing faster ROI and cost optimization projects. As of now, there are not enough signs of H2 being better than H1 too. 

Headcount rose by only 523, now growing at 1.5% YoY. LTM attrition was down to 17.8% versus 20.1% in Q4FY23. Abating supply-side challenges (attrition down 230 basis points sequentially) should lead to better EBIT margins in FY24, believe analysts at IIFL Capital Services. They have largely maintained their EPS/Target Price, pegged at 24x 2YF EPS, as they are forecasting 8%/12% USD revenue/EPS CAGR over FY23-25. Analysts at IIFL Capital Services expect to see better resilience in growth and margins for TCS this year versus peers.

Key risks include currency volatility and weakness in global IT spending.