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Revenue a miss: TCS Q2FY24 revenue came in below our expectations. Its rupee revenue was up by 0.5% QoQ and 7.9% YoY to Rs 59,692cr and revenue in USD came in at USD 7,210mn, de-growth of 0.2% but growth of 4.8% YoY. Further, growth in constant currency was higher by 2.8% YoY. There is uncertainty around client spending and they are more focused on optimization of deals, so some of them are getting reprioritized which resulted in moderate revenue growth. Amongst geographies, North American region growth was flat and amongst verticals BFSI, media and technology witnessed negative CC growth, so this impacted the overall revenue performance. On the flip side, the UK region showed decent growth of 10.7% YoY in CC and manufacturing as well as energy & Resources grew by 5.8% YoY and 14.8% YoY, respectively

Healthy improvement of margins: TCS EBIT grew by 9.1% YoY and 5.3% QoQ to Rs 14,483cr while margin improved by 25bps YoY and 110bps QoQ to 24.3%. For margins, improving utilization & productivity as well as reduction in sub contract and curtailing discretionary spends aided improvement while margin impacted by higher investment in infrastructure. In the long run, management aspires to achieve margins of 26-28%.

Attrition Moderated: TCS attrition further eased to 14.9% in Q2FY24 as compared to 17.8% (down by 290bps) in Q1FY24 and 21.5% in Q2FY23 (down by 660bps) is positive. Meanwhile, the company strategy is to train employees and improve productivity, so ~over 1 lakh employees are trained for artificial intelligence skill sets, even though the avg. contracts on generative AI are worth less than USD 1mn.

Record order book for Q2FY24: The company won deals worth USD 11.2 bn, up by 9.8% QoQ and 38.3% YoY. Geographically and vertically the deals are earned from North America TCV at USD 4.5bn, BFSI TCV at USD 3bn and Consumer Business TCV at USD 1.4bn but did not see much translation into revenue. Amongst the deals, BSNL and JLR is the largest followed by other deals from government of India, GE Healthcare, Athora Netherlands, ASDA, British Council, Georgia Department of Labor, Culina UK’s supply chain manager, etc.

Announcement of BuyBack: The company has proposed a buyback wherein its offer price is at 15% premium from current closing price of Rs 3,610. They have approved upto 4.09 lakh Equity Shares worth Rs 17,000cr representing 1.12% of the paid-up equity at a price of Rs 4,150/share. The Buyback is subject to shareholders approval.

Management outlook: 1) TCS strategy of hiring freshers, training them and improving productivity is aiding growth. 2) Clients are looking for definitive signs of recovery and they are expected to start spending on cloud, digital and new technology. 3) BSNL deal is important for the company. 4) Announced dividend of Rs 9/share.

Outlook & Valuation: TCS posted mixed numbers for Q2FY24 wherein revenue missed our estimates but margins improved, order inflow was strong and attrition eased. Further, management still remains cautious for the near term on the back of anticipated uncertainty around macro environment, however from a long term perspective strong demand for newer technology, record order inflows, client willingness to commit for long term deals and investment towards development of technology and training employees is positive. Meanwhile, the company’s focus continues on translating deals to revenue, managing cost and improving margins. On the financial front, we have estimated its revenue/EBIT to grow at 16.5/19.8% CAGR over FY23-25E. Our view remains mixed for TCS and that is the reason we have revised our rating to Accumulate from Buy earlier, with upward revision in target price to Rs 4,089. 

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