Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities and Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities.
TCS - Growth normalisation ahead
TCS delivered revenue beat and in-line operating performance in Q3FY23. Revenue growth of 2.9% QoQ (1.2% est.) was driven by a disproportionate rise in Regional Market & Others segment (>40% of incremental sequential growth), based on growth in product and APAC business. Markers for growth deceleration (normalisation) for TCS include soft deal bookings, decline in headcount (also due to bench optimisation), and lower pipeline to bookings conversion in Continental Europe (~15% of revenue). Plans of headcount addition for FY24E (125-150k gross including >40k freshers) and reversion to pre-covid attrition also point to growth moderating in a linear framework. TCS growth will be driven by (1) increased vendor consolidation and cost optimisation deals (reflecting in bookings from UK geo such as BT deal) supported by TCS' full-stack portfolio; (2) growth in the qualified deal pipeline reflecting commitment towards long-term tech programs and on realisation improvement; (3) bookings trajectory in the BFSI vertical (8% QoQ in BFSI TCV vs. 8% decline in TCV ex-BFSI); and (4) manufacturing vertical delivering better-than-anticipated (and non-extended) furlough in Q4. Our TP of INR 3,560 is based on 26x Sep'24E EPS with EPS CAGR of 11% over FY22-25E; we maintain ADD.
Q3FY23 highlights: (1) Revenue at USD 7,075mn grew 2.9% QoQ and 8.4% YoY (13.5% CC), led by Regional Market & Others, Healthcare & Life-science vertical and Manufacturing vertical. (2) EBITM expanded 50bps QoQ to 24.5%, supported by USD-INR +70bps QoQ, and the company reiterated the Q4FY23 EBITM outlook of 25%, supported by bench optimisation. FCF/PAT were steady at 96% (vs. 97% in Q2). (3) Headcount declined by 2k sequentially and stood at 614k; 9M fresher addition of 42k and management highlighted >40k fresher addition plans for FY24E. (4) Deal bookings declined sequentially to USD 7.8bn (outlook of USD 7-9bn quarterly) with book-to-bill at 1.10x (vs. 1.18x in Q2). BFSI TCV was USD 2.5bn and Retail & CPG TCV was USD 1.2bn.
Outlook: We have factored in revenue growth of +12.4% YoY CC for FY23E, which will moderate to 7.5% YoY CC in FY24/25E, with an implied CQGR of 1.9/1.8% respectively. EBIT margin is factored in at 24.2/25/25% each for FY23/24/25E. Valuation is at 25x FY24E EPS, with FY22-25E EPS CAGR at 11%.
Shares of Tata Consultancy Services Limited was last trading in BSE at Rs. 3286.20 as compared to the previous close of Rs. 3319.70. The total number of shares traded during the day was 94932 in over 9569 trades.
The stock hit an intraday high of Rs. 3292.50 and intraday low of 3231.00. The net turnover during the day was Rs. 309376487.00. |
