TCS Q4 Results Show Slowdown Is Here, Despite Stellar Dealmaking

The management commentary by Tata Consultancy Services Ltd. on near-term demand after its March quarter results were among the weakest in recent history, according to analysts, even as deal wins remained buoyant in an uncertain environment.

The muted outlook was reflected in the company’s share price as well. On Thursday, the stock fell 1.61% on the BSE even as the benchmark Sensex ended the day flat.

Revenue at India’s largest IT services firm increased 1.6% over the previous quarter to Rs 59,162 crore in the three months ended March 31, according to an exchange filing on Wednesday. That compares with the Rs 59,505 crore consensus estimate of analysts tracked by Bloomberg.

TCS Q4 Results: Key Highlights (QoQ)

• Revenue up 1.6% at Rs 59,162 crore (Estimate: Rs 59,505 crore)

• EBIT up 1.4% at Rs 14,488 crore (Estimate: Rs 14,896 crore)

• EBIT margin at 24.48% versus 24.53% (Estimate: 25.03%)

• Net profit up 5.08% at Rs 11,436 crore (Estimate: Rs 11,535 crore)

The company’s full-year revenue increased 17.6% year-on-year to Rs 2,25,458 crore. In constant-currency terms, it was up 13.7%. Net profit for FY23 stood at Rs 42,147 crore, up 10% over the year-ago period.

"The March quarter has been weaker than anticipated, primarily due to North America," said Rajesh Gopinathan in a post-earnings presentation—his last as TCS CEO. "We were expecting a comeback, after a seasonally weak third quarter, but that didn’t happen."

The new financial year, then, doesn’t look bright—at least in the near term.

"The management did not indicate when it expects growth to pick up and whether it will be front-loaded or back-loaded in FY24," said Girish Pai, head of research at Nirmal Bang, in an April 13 note. "We suspect that growth will be broadly weak across all quarters and possibly turn weaker in the second half since we think that the adverse impact of a weak macro is ahead of us and not behind us."

The body language of the management, too, seemed tentative on the near-term growth outlook, indicating that industry demand visibility is weak, Pai said in the note.

Motilal Oswal also holds a similar view in its post-earnings note.

The TCS management has indicated weakness in the U.S. due to delayed client spending, with banking and financial services most affected. Revenue growth in the biggest vertical fell to 9.1% in Q4 FY23 as against 11.1% in the previous quarter. While that’s concerning, the near-term pain is partially factored in for FY24.

"We continue to expect FY24 growth to be rear-ended, with the expectation of a macro improvement in the second half. While expectations from the BFSI space are low, elevated uncertainty remains the key risk to our estimates," Mukul Garg, Pritesh Thakkar, and Raj Prakash Bhanushali of Motilal Oswal said in a note.

TCS’ BFSI vertical is likely to grow at 5% year-on-year in constant currency terms in FY24, compared to the 11.8% growth seen in FY23, the brokerage said.

TCS disappointed with its operational performance as well, with an EBIT margin below the targeted 25% and missing estimates. That was due to the fact that the outsourcer chose to backfill attrition and keep its utilisation levels low due to the banking crisis.

Motilal Oswal, however, expects a part of the hit to reverse over the next couple of quarters as TCS redeploys the teams affected by the sudden slowdown. "Additionally, the continued easing in supply and replacement of subcontractors should help TCS deliver a 60 basis point year-on-year margin gain in FY24 to 24.7% and further to 25.5% in FY25 as demand recovers," Motilal Oswal said.

"We see significant headroom to improve utilisation and think TCS can get back to its 26-28% target EBIT operating margin band over FY24," Macquarie said.

Amid the doom and gloom that is TCS’ growth prospects, dealmaking emerged as a silver lining for the IT bellwether.

Despite a banking crisis, TCS’ total contract value—or new deal wins—rose to $10 billion in the March quarter on the back of the highest number of large deals. For the full year, the total contract value rose 28.2% quarter-on-quarter but fell 11.5% year-on-year to $34.1 billion. 

"The management has indicated the deals won have a faster conversion cycle compared to last year, even as these deals were heavy on the cost takeout side and perceived to be of a longer duration," Kotak Institutional Equities said in an April 12 note.

The seeming disconnect between management commentary and conventional wisdom may be due to the nature of deal wins in the previous fiscal, especially in Q4 FY22, where the total contract value of $11 billion was skewed by two deals of $1 billion each. This was not seen in Q4 FY23, as there was only one big deal worth $750 million and nearly 200 deals in the $50–100 million range.

"The deal wins indicate strong activity and decision-making even as a halt in certain discretionary programmes induces an uncertain near term," Kotak said.

Macquarie sees the sub-par performance in the March quarter as a minor blip in the larger scheme of things for India’s IT bellwether as it looks past the company's near-term weakness.

TCS’ BFSI vertical did well in the U.K., Canada, and Europe, and the management expects the U.S. business to recover as their customers are large banks, which are beneficiaries of the flight of cash from regional banks.

"With continued gross hiring ahead of attrition, 46,000 offers to fresh graduates for FY24, and converting some subcontractors to employees, the company management seems sanguine about demand over FY24," said Macquarie.

"We retain our estimates on TCS and maintain 'outperform'. We continue to maintain our preference for TCS to Infosys, expecting TCS and HCL Technologies to challenge Infosys’ growth leadership over FY24."