TCS Has A Macro Hangover Going Into FY25

Tata Consultancy Services Ltd. won’t hazard a guess on when growth will meaningfully return but is confident of an improvement in the ongoing fiscal. But not by much, according to analysts.

Despite better visibility compared to the previous quarters, record dealmaking and a broader pick-up across verticals, the management sounded cautious as it saw customers reducing the scope of or pushing out existing contracts due to macroeconomic uncertainty, Girish Pai and Suket Kothari of Nirmal Bang said in an April 13 note.

“TCS did not want to be drawn into a discussion on the H1 vs H2 trajectory or when exactly the turn in demand would happen in FY25,” they said. “TCS retained its stance that FY25 will be a better year than FY24, and we think so too, but not by much.”

Nirmal Bang expects TCS to clock a dollar revenue growth of 5.4% in FY25 versus 4.1% in FY24, or a compounded quarterly growth rate of 1.8% in FY25 as against 0.6% in FY24.

The revenue of India’s largest IT services firm rose 1.1% over the previous three months to Rs 61,237 crore in the quarter ended March 31, 2024. That, according to CEO K. Krithivasan, missed the mark by up to 100 basis points due to sluggishness in its largest market and the biggest revenue generator. While the US brings in about half of the top line, the financial services domain makes up about a third.

Still, TCS was able to increase its operational profitability—measured as earnings before interest and tax—by 97 basis points to 26%, or at the bottom end of the targeted 26-28%.

Note: One basis point is one-hundredth of a percentage point.

“Margin surprise lifts our EPS (earnings per share) estimates ~2%, but the commentary on limited visibility into near-term revenue growth trends could be a near-term multiple drag,” Gaurav Rateria and Sulabh Govila, equity analysts at Morgan Stanley, said in an April 12 note. “The management expects revenue growth in FY25 to be better than FY24, but the discretionary spending climate is still volatile, so predictability is lacking.”

It’s worth mentioning here that TCS clocked a record total contract value of $13.2 billion in the March quarter, with better net new and more short-cycle orders. TCV for the full year was at an all-time high of $42.7 billion.

Here’s a look at what the brokerages had to say on TCS’ Q4 results:

Target Price: Rs 3,634; Implied Downside: 9%; Rating: Sell

• TCS' revenue growth in Q4 FY24 was up 1.1% QoQ—in line with estimates. The EBIT margin expansion of 100 bps QoQ beat estimates.

• TCS stated that Q4 FY24 revenue could have been 50–100 bps higher had it not been for customers cutting back on existing projects. 

• Improved pricing will remain a key lever for incremental margin expansion. Utilisation, productivity, and the pyramid too will act as levers going forward.

• Revenue and EPS estimates were revised marginally upwards for FY25–FY27, considering the higher TCV and margin outperformance.

Target Price: Rs 4,350; Implied upside: 9%; Rating: Overweight

• TCS expects revenue growth in FY25 to be better than FY24, but the near-term outlook is hazy due to the volatile discretionary climate.

• A strong exit margin supports a better outlook for FY25. Relative valuation is not cheap, but hopes of a rebound keep multiples afloat.

• TCS management did indicate that things are bottoming out, but indicated that calling the timing of a recovery is tricky.

• FY25 growth estimates were revised lower to 5.8% from 7.2%. Two-year forward P/E at 25.2 times is above the five-year average of 24.5 times.

Target Price: Rs 4,540; Implied upside: 13.9%; Rating: Buy

• TCS reported a margin beat for Q4 FY24, led by strong margin expansion, while its revenue was a tad lower than expected. 

• Deal wins were strong, with a book-to-bill ratio of 1.8 times. Management is non-committal on the pace of growth recovery in H1 FY25. Discretionary spending is weak.

• That margin was strong in FY24 despite the higher pass-through revenue, which is creditworthy, underscoring TCS’s superior execution capabilities.

• The margin beat was led by lower subcontractor costs and a reduction in SG&A (selling, general and administrative expenses), which looks sustainable.

• TCS is likely to grow slightly better than the sector (6-7%) over the next three years, despite its size and top-notch margin.