Q4FY24 Review: TCS: Strong deals but no uptick in near term growth

15 Apr 2024 , 11:26 AM

TCS reported revenue growth of 1.1% cc QoQ (2.2% cc YoY) in Q4, below IIFLe of +2.7% cc QoQ, on lower than estimated revenues from BSNL deal (~0.6% vs. 2%). Ebit margins at 26% (+100bps QoQ) were above IIFLe of 24.9%, on sharp decline in subcontracting costs (-190bps QoQ). Deal wins were strong at USD13.2bn (+32% YoY, 1.8x book-to-bill), including one mega deals. TCS commented that clients continue to prioritize cost optimization projects and there is no material acceleration in near term IT demand. Abating supply-side pressures (attrition down 80bps QoQ) should continue to support margins even as TCS will hire 40k freshers this year. TCS’ commentary reaffirms analysts of IIFL Capital Services view of only gradual recovery in revenue growth as project completions and lack of new ramp ups beyond large deals weigh on growth. Analysts of IIFL Capital Services largely maintain their EPS/TP, pegged at 25x 2YF EPS, and forecast 8%/12% USD revenue/EPS Cagr over FY24-26. Maintain ADD.

Regional markets drive sequential growth:

Revenue growth of 1.1% cc QoQ (+2.2% cc YoY) was led by Regional markets (+6.1% QoQ) and Manufacturing (+3.5%), partly offset by decline in Tech (-1.3%), Energy (- 0.6%) and Comm (-0.4%). BFSI was flat QoQ. Within geographies, Cont. Europe and Americas declined QoQ, while India and UK led growth. TCS reported highest ever deal TCV of USD13.2bn (+63% QoQ/+32% YoY). Management indicated that near-term demand environment for discretionary spend remains muted given the macro uncertainties.

Ebit margins improves:

Ebit margins improved to 26% (+100bps QoQ), on sharp decline in subcon costs (-190bps QoQ), partially offset by rise in cost of hardware (+90bps). Analysts of IIFL Capital Services believe continued supply side tailwinds should support margins despite lower growth. Headcount declined by 1.8k and LTM attrition dropped by 80bps QoQ to 12.5% even as TCS guided for 40k fresher hiring and wage hikes of 4.5-7% on average in Q1FY25.

Maintain ADD:

Analysts of IIFL Capital Services fine tune their EPS and maintain TP, forecasting 8%/ 12% USD CC revenue/EPS Cagr over FY24-26. Their 12-mth TP of Rs4,000 is based on 25x 2YF EPS. Analysts of IIFL Capital Services believe TCS is well equipped to navigate through the macro challenges. Hence, given the relatively better earnings resilience, premium valuations are justified. Maintain ADD. Risks: Currency.