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Demand resilient; benign conditions ahead

Tata Consultancy Services (TCS), a subsidiary of Tata Sons Ltd, is a global IT services organisation. It provides a comprehensive range of services to its clients in diverse industries. The company caters to finance and banking, insurance, telecommunication, transportation, retail, manufacturing, pharmaceutical and utility industries.

* Revenue of TCS in Q2FY23 grew a significant 18.0% YoY to Rs 55,309 cr, mainly due to solid gains across verticals.

* Operating margin expanded 90 bps QoQ to 24.0% (-160 bps YoY), supported by operational efficiencies, improved realisations and favourable currency changes. The PAT margin stood at 18.9%.

* Despite the economic headwinds in the quarter, TCS rebounded on strong demand for its services. The growth was primarily driven by higher demand for cloud platforms and continued customer interest in technology services as reflected in deal wins. We expect revenue to rise further, supported by operating efficiencies and cost optimisation. We upgrade our rating to BUY on the stock with a revised target price of Rs 3,635 based on 28x FY24E adjusted EPS.

Resilient revenue growth across verticals

TCS posted a revenue of Rs 55,309cr (+18.0% YoY) in 2QFY23, broadly based across verticals led by retail and consumer business (+23.5% YoY) and communication (+21.0% YoY). In retail, TCS witnessed an uptick in demand in travel and hospitality sub-segments, while order book stood at USD 1.6billion. In the communication segment, growth was on the back of investments in 5G and personalised offerings to end customers. Revenue from the BFSI segment rose 14.4% YoY to Rs 21,110cr, with clients’ spending on cloud, enterprise application services and cyber security, having a total contract value of USD 2.3billion. Revenue from life sciences and healthcare and others increased 20.4% YoY to Rs 10,433cr.

Key concall highlights

• In Q2FY23, the company added five more new clients in the USD100 million(mn) band, ten clients in the USD50mn plus band, and 36 more clients in the USD20mn band, bringing the total clients to 2781.

• The company added 9,840 employees in the quarter, taking its total headcount to 616,171. In the last twelve months (LTM), the IT services attrition rate increased to 21.5% (19.7% in 1QFY23).

Margin recovery

During the quarter, operating profit increased 9.0% QoQ to Rs 13,279cr. Operating margin widened +90 bps QoQ to 24% (-160 bps YoY) on account of favourable currency movement, operational efficiencies from flattening of workforce pyramid, and enhanced productivity of fresh hires. Consequently, net profit increased 10.0% QoQ to Rs 10,431cr, crossing Rs 10,000cr milestone in quarterly net profit. Net profit margin expanded 90 bps QoQ to 18.9%.

Valuation

TCS has built a resilient business model by securing long-term contracts with leading brands. As such, we believe technology spending should continue to increase and expect other secular tailwinds to drive healthy growth over the medium term. Moreover, the stock has also corrected 15.3% in the past six months, suggesting a buying opportunity. Hence, we upgrade our rating on the stock to BUY with a revised target price of Rs 3,635 based on 28x FY24E adjusted EPS.

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