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Tata Consultancy Services (TCS) has reported better-than-expected revenue growth of 4% QoQ in CC terms vs I-Sec/consensus expectations of 3.4%/3.5% for Q2FY23. However, US$ revenue growth was lower at 1.4% QoQ due to cross-currency headwinds of 260bps QoQ. Sequential revenue growth was led by technology & services, life sciences & healthcare, manufacturing and retail & CPG. Financial services reported below company average growth in Q2FY23 due to weakness in insurance segment. In terms of markets, US led with 3.3% QoQ US$ growth. Broad based revenue growth and margins in line with estimates despite rising attrition were comforting. Deal TCV was healthy at US$8.1bn, but growth in TCV was modest at 6.6% YoY, - 1.2% QoQ. Book-to-bill was healthy at 1.2x. However, management alluded elongation of decision-making cycle reflected in qualified deal pipeline growing at slower pace than overall pipeline. Management also cited that clients are cautious on their spending decisions, especially in Europe & UK given the tough winter which might lead to shutting down of manufacturing plants creating ripple effect across industries. Discretionary retail and P&C insurance segments are also exhibiting slowdown in spending due to macro impact. We expect muted revenue growth in H2FY23 due to furloughs in Q3FY23 and weak macro environment especially in Europe & UK. Net headcount addition reduced further to 9,840 employees, 1.6% QoQ vs 25.8K net addition per quarter in FY22. Whereas LTM attrition inched up to 21.5% (+180bps QoQ). Slowing hiring momentum despite elevated attrition levels indicates lower demand visibility ahead. TCS reported in line EBIT margin of 24%, +90bps QoQ benefitted by tailwinds of 50bps from currency movement and operational efficiencies from pyramid, productivity-linked realisation improvement and lower sub-con costs partially offset by headwinds of 20bps from higher facility costs. Near-term margin levers are improvement in utilisation and realisation and headwind from attrition subsiding. Management expects quarterly attrition to taper down from next quarter (Q3FY23). We slightly decrease our US$ revenue estimates, but our EPS estimates increase due to FX changes (increased USD/INR assumption from 80 to 82 for H2FY23 & FY24). We forecast revenue growth of 7.6% and 6.4% for FY23E and FY24E, respectively. TCS has better-than-peers supply-side management, breadth of capabilities and deep domain expertise. While demand may slowdown in future, TCS will likely gain share from peers. It will also most likely gain in vendor consolidation exercise. Maintain HOLD with a fair value of Rs3,191 based on a target multiple of 25x FY24E earnings.

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