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* TCS reported in-line revenue of USD7.2b in 1QFY24, flat QoQ in constant currency (CC) and a tad below our estimate of 0.3% CC. Revenue growth was affected by broad-based demand weakness across key verticals (BFSI) and geographies (US). The management indicated that a demand slowdown due to macro concerns is leading to reprioritization of deals, which is resulting in pauses and deferrals in non-critical projects. While the deal pipeline and deal wins (Q1 deal TCV of USD10.2b, book-to-bill at 1.4x) are good, smaller discretionary projects are getting impacted.

* 1Q EBIT margin declined by 130bp (to 23.2%) due to seasonal wage hikes and was in line with our estimate. The management expects margins to improve gradually over the next three quarters, in line with past trends.

* TCS remains cautious about near-term demand amid adverse macros, while it is quite optimistic about the secular long-term trend. The weakness persists in verticals like BFS, Communication and Retail due to a slowdown in discretionary spending, while the focus is shifting to efficiency-driven projects. The management also indicated that the small deals are getting scrutinized and taking more time to ramp up. However, the company was able to maintain its deal TCV at USD10.2b in 1Q, which we see as a key positive and differentiator for TCS.

* While we have trimmed our estimates for FY24, we continue to expect TCS to deliver superior growth in the near term among our Tier 1 coverage on account of its leadership in cost efficiency, which has resulted in strong inflows for the last two quarters. We expect the trend to continue, providing better visibility for FY25 revenue growth despite an uncertain demand environment. We factor in a USD revenue CAGR of 10.7% over FY23-25E.

* With in-line Q1 EBIT margin performance, TCS should benefit from its scale and ability to manage talent to control costs in the near to medium term. This is especially visible in the fact that it has given timely increments despite growth concerns, which we expect to pay out over the medium term through easing attrition. This should allow it to deliver a 14.8% PAT CAGR over FY23-25E.

* We have largely maintained our FY24/FY25 EPS estimates. Our TP of INR3,790 implies 25x FY25E EPS (16% upside). Reiterate BUY on the stock.

In-line revenue and margin

* Revenue growth (CC) was flat QoQ. INR EBIT/PAT rose 13%/17% YoY.

* EBIT margin of 23.2% (down 130 QoQ) was in line with our expectation. Margin was affected by wage hikes, offset by the improvement in subcon.

* The net headcount moderated further, with the addition of 523 associates vs. a net addition of 821 in 4Q.

* TCS announced an interim dividend of INR9/share in 1QFY24, with an overall payout of INR33b.

* The cash conversion was strong at 76% OCF/EBITDA, while FCF/PAT stood at 99% in 1Q.

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