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Broadly inline operating performance; signs of moderation in demand environment

Result Synopsis

Tata Consultancy Services(TCS) reported broadly inline quarterly performance. The USD reported revenue was impacted due to cross currency headwinds. However, the depreciation of INR by around 3.4% QoQ supported the INR reported growth. The revenue growth was led by strong performance in Retail and CPG vertical(up 22.9% YoY). There was sequential improvement in EBIT margin(up 91bps QoQ) led by improving employee pyramid and other efficiency measures. Employee attrition remained high as LTM attrition increased by 180 bps QoQ to 21.5%. The long term demand story remains intactled by cloud adoption and data analytics across enterprises. Deal environment remains strong but 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 over next 2 quarters led by improving employee pyramid and better utilization. We estimate revenue CAGR of 12.7% over FY22-24E with average EBIT margin of 24.9%. We change our rating on the stock from BUY to ADD  with revised target price of Rs 3,536/share at 27x on FY24E EPS. We have slightly reduced our target multiple from 28x to 27x to account for risks from evolving macroeconomic   situation in key markets of TCS. The stock trades at PER of 27.9x/23.8x on FY23E/FY24E EPS.

Result Highlights

* Reported revenue of Rs 553.1bn, up 4.8% QoQ in INR terms (up 1.4% in USD terms). INR revenue was supported by depreciation of INR by 3.4% QoQ vs USD.  

*  The revenue growth was led by seasonally strong quarter and robust performance by verticals such as Retail and CPG (up 22.9% YoY), Communications and Media (up 18.7% YoY), Technology and Services (up 15.9% YoY). The cc growth for TCS was 15.4% YoY.

* EBIT margin increased by 91 bps QoQ to 24.0% led by positive operating leverage as cost of services grew 2.5% QoQ

* Deal booking remained strong as it reported TCV of $8.1bn (vs $8.2bn in Q1FY23)

* Added 9,840 employees in the quarter to close at 616,171 employees. LTM attrition increased by 180 bps QoQ to 21.5%

* Declared dividend of Rs 8/ share, with record date as 18 Oct 2022.

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