TCS Growth May Moderate In Second Half Of FY23 On Macro Woes, Say Analysts

Tata Consultancy Services has reported its Q3 results where it delivered on the revenue front but missed the bottomline.
<div class="paragraphs"><p>TCS CEO Rajesh Gopinathan. (Photo: Sajeet Manghat/BQ Prime)</p></div>
TCS CEO Rajesh Gopinathan. (Photo: Sajeet Manghat/BQ Prime)

Growth at Tata Consultancy Services Ltd. is likely to moderate in second half of the fiscal ending March 31 as dealmaking decelerates due to geopolitical factors, according to analysts.

That, after India's largest software services firm reported third-quarter results which delivered on the revenue front but missed the bottomline estimate.

Revenue of the IT bellwether increased 5.2% over the previous quarter to Rs 58,230 crore in the three months ended Dec. 31, according to an exchange filing on Monday. That compares with the Rs 57,205-crore consensus estimate of analysts tracked by Bloomberg.

TCS Q3 Results: Key Highlights (QoQ)

  • Revenue up 5.2% at Rs 58,230 crore (Estimate: Rs 57,205 crore)

  • EBIT up 7.56% at Rs 14,284 crore (Estimate: Rs 14,075 crore)

  • EBIT margin at 24.53% versus 24% (Estimate: 24.6%)

  • Net profit up 4% at Rs 10,883 crore (Estimate: Rs 11,083 crore)

The company has announced an interim dividend of Rs 8 per share and a special dividend of Rs 67 per share. That translates to a total payout of more than Rs 33,000 crore to shareholders, year-to-date.

A declining headcount and a three-year low book-to-bill ratio of 1.1 indicate a sharp growth moderation, Jefferies said in a note on Tuesday. "Over FY23-25, we expect TCS to deliver 7.5% CAGR in constant currency revenue and 11% EPS CAGR," the note stated. "TCS' premium valuations may limit upside."

The brokerage maintains a "hold" on the stock with a target share price of Rs 3,500 apiece.

TCS, in a post-earnings call, noted that while deal momentum and pipeline remain robust, 2023 budgets remain uncertain. It will take at least a couple of months before there’s clarity on client spending as decision-making remains slow amid a fluid macro environment, it said.

The company, however, exuded confidence in delivering an operational profitability of 25% in the quarter ending March 31. The EBIT margin rose 50 basis points sequentially to 24.5% in the October-December quarter, due to currency tailwinds and improved execution. Wage pressures are also easing, with the attrition rate dropping to 21.3% even as headcount fell for the first time in ten quarters. 

WATCH | Analysts' Take On TCS Q3 Results

Still, Nomura prefers rival Infosys Ltd. over TCS.

"We expect TCS to continue to lag Infosys on revenue growth in FY23–24F (continuing from the FY20–22 trend)," the brokerage said in a post-earnings report. "We maintain our target price at Rs 2,850 with a ‘reduce’ rating."

Morgan Stanley, however, reposed faith in the Tata Group company.

"Revenue growth of 2.2% QoQ/13.5% YoY in constant-currency terms is reasonably strong," the brokerage wrote in a post-earnings report. "Based on 9MFY23 performance, we expect TCS to end FY23 with around 14% YoY constant-currency revenue growth, which would be quite resilient in the current environment."

The constructive commentary on North America, where the challenges are not structural, was balanced by the weak outlook for Europe, Morgan Stanley said. In the UK, while the market is challenging, TCS is winning its fair share. 

"Even in the current challenging environment, TCS saw QoQ growth in its qualified pipeline," the brokerage said. "We believe the current quarter revenue beat and balanced commentary should build some optimism for FY24 growth."


Tushar Deep Singh is a Mumbai-based business journalist...more
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