IGI Logo

Margin gain to add to earnings growth; reiterate BUY

* TCS reported revenue of USD7.20b in 4QFY23, up ~0.6% QoQ in constant currency (CC) terms and 30bp below our estimates. Revenue growth was affected by a slowdown in the BFSI vertical in the second half of the quarter. TCS indicated a demand slowdown in key verticals, primarily in discretionary spends, while cost efficiency spends remained robust. Q4 deal TCV was strong at USD10.0b (up 28% QoQ, book-to-bill ratio at 1.4x), bringing FY23 TCV to USD34.1b (flat YoY) despite a muted macro environment.

* Q4 EBIT margin was flat at 24.5% (v/s our est. of 30bp QoQ increase), impacted by a pause in few discretionary projects in Mar’23, along with higher onsite employee costs, partially compensated by lower subcontractor expenses.

* Management commentary on near-term demand was among its weakest in recent history (excluding initial months of pandemic). Management indicated weakness in the US on account of deferrals in discretionary spending from clients, with the BFS vertical being the most affected. While we view it as concerning, the impact on our estimate for FY24 revenue growth (7.7% YoY CC, a cut of 40bp from our previous estimate) is limited, as a near-term slowdown has been widely expected and partially factored in our estimates (our BFSI FY24 revenue growth estimate is 5.0% YoY CC, down from 11.8% YoY in FY23). Moreover, while FY23 TCV (1.2x book to bill) was flat YoY, TCS highlighted a faster revenue conversion cycle due to smaller share of mega deals (one in FY23 v/s 3 in FY22) in the mix, which should compensate for the discretionary slowdown.

* We continue to expect FY24 growth to be rear-ended, with the expectation of a macro improvement in the second half. While expectation from the BFSI space is low, elevated uncertainty remains the key risk to our estimates (both downside and upside). We factor in a USD revenue CAGR of 10.7% over FY23-25E.

* While the Q4 EBIT margin performance was disappointing, part of the hit should reverse in the next 1-2 quarters as TCS redeploys the teams affected by the sudden slowdown in Mar’23. Additionally, the continued easing in supply (quarterly attrition down 10pp from peak) and the replacement of subcontractors should help TCS deliver 60bp YoY margin gain in FY24 to 24.7% and further to 25.5% in FY25 as demand recovers. This should allow it to deliver a 15.7% PAT CAGR over FY23-25E.

* TCS has delivered INR PAT growth of 10.0% in the FY23. It generated FCF of INR414b during the year and has INR498b in Cash and Investments at the end of the year.

* We have largely maintained our FY24/FY25 EPS estimates. Over FY23-25, we expect a USD revenue CAGR of 10.7% and an INR EPS CAGR of 15.7%. Our TP of INR3,860 implies 25x FY25E EPS (19% upside). We reiterate our BUY rating on the stock.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer