Q2FY24 Review: TCS: Strong TCV comforting, but no uptick in growth

12 Oct 2023 , 11:16 AM

TCS reported revenue growth of 2.8% cc YoY (flat cc QoQ) in Q2, below IIFLe of +1.2% cc QoQ, as Consumer, TMT and US remained soft. At 24.3% (+110bps QoQ), Ebit margins were above IIFLe of 24%, on productivity improvements. Deal wins were strong at USD11.2bn (+38% YoY, 1.6x book-to-bill), including BSNL and JLR mega deals. TCS commented that clients continue to prioritise costoptimisation projects and there is limited visibility for acceleration in H2. Abating supply-side challenges (attrition down 290bps QoQ) should help offset margin pressure from the ramp-up of mega deals in H2, in analysts of IIFL Capital Services view. TCS announced a share buyback of Rs170bn at Rs4,150 per share (15% premium to last close), which, analysts of IIFL Capital Services believe will provide support to the stock in the near term. Analysts of IIFL Capital Services largely maintain their EPS/TP, pegged at 24x 2YF EPS, and forecast 8%/12% USD revenue/EPS Cagr over FY23-26. Maintain BUY. 

No improvement in demand environment: 

Revenue growth of 2.8% cc YoY (flat cc QoQ) was mixed across verticals, with growth in Mfg (+2.2% QoQ) and Energy (+1.6%) offset by decline in Comm (-1.6%), Consumer (-1.5%) and Tech (-1.4%). Within geographies too, the Americas and Europe declined QoQ even as the UK saw modest growth. TCS reported the second-highest deal TCV ever, of USD11.2bn (+10% QoQ/+38% YoY). Despite the ramp-up of new deals being on track, leakage from deal completions and certain project ramp-downs continued to impact growth. 

Despite soft growth, Ebit margins improved: 

Ebit margins improved to 24.3% (+110bps QoQ) on productivity improvements despite higher infra costs. Analysts of IIFL Capital Services believe continued supply-side tailwinds should help TCS protect and expand margins, despite the lower-growth/mega-deal ramp-ups in H2. Headcount declined by 6.3k, as TCS focused on better-utilising the existing resources. LTM attrition was down to 14.9% vs 17.8% in Q1FY24. 

Maintain BUY: 

Analysts of IIFL Capital Services fine-tune their EPS and maintain their TP; forecast 8%/12% USD CC revenue/EPS Cagr over FY23-26. Analysts of IIFL Capital Services 12-month TP of Rs3,800 is based on 24x 2YF EPS. Analysts of IIFL Capital Services believe that TCS is better-equipped to navigate through the current macro challenges. Hence, given the relatively-better earnings resilience and potential support from the buyback, they maintain BUY. Risks: Currency volatility, weakness in global IT spending.