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*TCS on 16th Mar’23 announced the resignation of its Managing Director and CEO, Mr. Rajesh Gopinathan, effective 15th Sep’23. The board has nominated its President and BFSI business group head, Mr. K. Krithivasan (Krithi), as the CEO Designate from 16th Mar’23, and he will take over as MD and CEO in FY24 after shareholder approval. As per the company, Mr. Gopinathan is stepping down after 10 years as CXO (CFO followed by CEO) to pursue new interests.

* Unexpected Exit: Mr. Gopinathan’s departure from TCS is surprising, as he has led the company for only six years and was expected to continue for the long term given his age (52 years). Moreover, while the company’s growth has trailed peers like Infosys recently, it has handled external pressures, including a transition to Digital delivery and the Covid impact relatively well despite its size.

* Expect business continuity: Given Mr. Krithi’s long tenure at TCS (34 years), we expect the company to maintain its operational performance intact. He oversees the largest industry unit at the company (32% of FY22 revenues) and has experience across roles, including delivery, CRM, program management and sales, which should help TCS maintain its track record of seamless transition. We do not expect meaningful leadership attrition due to this change.

* Positive initial impression: Our initial feedback points to a positive internal and external view of Mr. Krithi as a business leader. Notably, given his leadership of the unified BFSI vertical since 2017, he is unlikely to face external questions on client relationships that Mr. Gopinathan faced as CFO of TCS in 2017.

* Tenure as CEO to be limited: Unlike previous transitions, where incoming CEOs had a long runway in front of them till retirement at 65 years – Mr. S Ramadorai (CEO at 51 years), Mr. N Chandrasekaran (CEO at 45 years) and Mr. Gopinathan (CEO at 46 years), Mr. Krithi is 58 years old and will be CEO for the next 6-7 years only. While this limits the flexibility for him, we expect TCS to continue to benefit from the recent changes in its operating model (in 2022) as well as significant recent intake of freshers in the system.

* TCS remains our top pick: We continue to see TCS as the best play in the IT services space in the current environment. It is focused on cost optimization and vendor consolidation, both of which are its strong areas. TCS is also poised to gain from a favorable pyramid mix change to improve margins in FY24, ahead of its peer group.

* Near-term weakness a buying opportunity: We expect a USD revenue CAGR of ~11% and an INR EPS CAGR of ~16% over FY23-25. Our TP of INR3,810 implies 24x FY25E EPS, with a 20% upside potential. We have a BUY rating on the stock and would recommend adding to the name on any near-term weakness due to this news

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