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Inline operating performance; Concerns regarding near term demand environment

Result Synopsis

Tata Consultancy Services(TCS) reported broadly inline quarterly performance. It reported USD revenue growth of 2.9% QoQ. However, the depreciation of INR vs USD by around 2.9% QoQ supported the INR reported growth. The revenue growth was led by strong performance in Retail and CPG vertical(up 18.7% YoY). There was sequential improvement in EBIT margin(up 52bps QoQ) led by improving employee pyramid and other efficiency measures. Employee attrition remained high as LTM attrition declined by 20 bps QoQ to 21.3%.

The long term demand story remains intact led by cloud adoption and data analytics across enterprises. However, there are definite signs of slowdown in deal conversion cycle on account of economic growth concerns in the US and Europe. The operating margin is expected to improve in near term led by improving employee pyramid and better utilization. We estimate revenue CAGR of 13.0% over FY22?24E with average EBIT margin of 25.0%. We maintain our ADD Rating with revised target price of Rs 3,561/share at 27x on FY24E EPS. We have maintained our target valuation multiple at 27x. The stock trades at PER of 29.5x/25.2x on FY23E/FY24E EPS.

Result Highlights

* Reported revenue of Rs 582.3bn, up 5.3% QoQ in INR terms (up 2.9% in USD terms). INR revenue was supported by depreciation of INR by 2.9% QoQ vs USD.

* The revenue growth was led by robust performance in verticals such as Retail and CPG (up 18.7% YoY), Communications and Media (up 13.5% YoY), Technology and Services (up 13.6% YoY). The cc growth for TCS was 13.5% YoY.

* EBIT margin increased by 52 bps QoQ to 24.5% led by positive operating leverage as cost of services grew 3.7% QoQ.

* Deal booking was impacted as it reported TCV of $7.8bn (vs $8.1bn in Q2FY23).

* Net headcount addition was (2,197) employees in the quarter and closed at 613,974 employees. LTM attrition decreased by 20 bps QoQ to 21.3%.

* Declared total dividend of Rs 75/ share (including special dividend of Rs 67/ share), with record date as 17th January 2023.

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