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Q1FY24 performance: Tata Consultancy Services (TCS) reported revenues of US$7,226mn (flat QoQ CC, +7% YoY CC, +0.4% QoQ USD), a tad below our and consensus estimates of +0.2% QoQ CC. Soft revenue growth during the quarter was due to growing caution among clients resulting in deferment of discretionary spends. EBIT margin came in at 23.2% (-130bps QoQ), slightly lower than our/consensus expectations of 23.6%/23.5%. Margins were impacted to the extent of 200bps from wage hikes, which was partially offset by reduction in sub-con costs (-84bps QoQ). Overall PAT came in at Rs110,740mn, slightly (~0.7%/0.8%) higher than our /consensus estimates due to higher other income. TCS reported a strong orderbook at US$10.2bn (+2% QoQ, +24.4% YoY) despite the uncertain macro environment. The orderbook does not include the large BSNL deal TCS announced recently. TCV was broad-based with North America TCV at US$5.2bn (+15.6% YoY), BFSI TCV at US$3bn (+3.4% YoY), retail TCV at US$1.2bn (+20% YoY). Headcount growth continued to be weak at 0.1% QoQ (+1.5% YoY) because TCS is focused on improving utilisation. (Chart 6)

Demand outlook: Persistent uncertainty surrounding the macro has led to growing caution among clients, which resulted in deferment of discretionary spends. Clients are scrutinising RoIs in existing projects and deferring or cancelling those with lower returns. BFSI, communications and hi-tech verticals continued to exhibit softness, while manufacturing, healthcare and retail did well during the quarter.

What to do with the stock?

TCS’ Q1FY24 result was largely in line with our expectations with a slight miss on margins due to flattish revenue growth and wage hikes that started on 1st Apr’23. Despite a strong orderbook of US$10.2bn (+24% YoY, +2% QoQ) and robust pipeline with BSNL contract of US$1.8bn yet to reflect in Q2FY24 orderbooking numbers, TCS management’s guarded commentary around demand pick-up in the near term reflects a high level of uncertainty around discretionary projects in certain key verticals like banking, hi-tech and telecom. It could also be a function of accelerated technology spends, which global enterprises carried out post pandemic and are now rationalising amid higher scrutiny of technology budgets. TCS’ strong orderbooking momentum and ability to invest upfront around building generative-AI capabilities, reflects its market readiness to adopt new technologies at a fast pace and win large cost-optimisation deals. We are building-in a gradual pick-up in demand for TCS for the remainder of FY24E with 5.9% YoY CC growth in revenues and 30bps YoY growth in EBIT margins to 24.4%. Our restraint is due to the uncertain demand outlook shared by TCS management in the near term for key verticals like banking, hi-tech and telecom. We modestly tweak our estimates post Q1FY24 result and maintain our BUY rating on the stock with a revised 12-month target price of Rs3,780 implying 16% potential upside. Strong orderbooking momentum, large deal win announcements, macro recovery in key geographies like the US and EU, and release of pent-up demand in the coming quarters would help TCS get back to double-digit revenue growth in FY25E.

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