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Inline operating performance; Deal booking robust at $8.1bn

Result Synopsis

Tata Consultancy Services (TCS) reported inline operating performance for the quarter. It reported USD revenue growth of 1.0% QoQ (up 1.7% YoY in cc terms); while INR reported growth was 1.5% QoQ. The revenue growth was led by strong performance in Energy & Utilities (up 11.8% YoY cc terms) and Manufacturing (up 7.0% YoY cc terms). EBIT margin decreased by 83 bps QoQ to 23.4% led by seasonal furloughs. LTM attrition was down 160bps QoQ to 13.3%.

The near term demand environment remains challenging as clients remain cautious across verticals and are taking longer time for decision making. It has resulted in slowing down of discretionary IT projects and this continues to impact near term revenue performance. Also, it continues to work on utilizing Generative AI in select use cases for client related projects. The operating margin is expected to improve over next 2 quarters led by improving employee pyramid and falling employee attrition. We estimate revenue CAGR of 10.4% over FY23?26E with average EBIT margin of 24.8%. We maintain our ADD Rating on the stock with revised target price of Rs 4,175/share at 25x on FY26E EPS. The stock trades at PER of 25.8x/22.4x on FY25E/FY26E EPS.

Result Highlights

? Reported revenue of Rs 605.8bn, up 1.5% QoQ in INR terms (up 1.0% in USD terms). The cc growth was 1.7% YoY.

? The revenue growth was led by robust performance in verticals such as Manufacturing (up 7.0% YoY cc terms), Life Sciences & Healthcare (up 3.1% YoY cc terms), Regional Markets & Others (up 19.2% YoY cc terms) and Energy and Utilities (up 11.8% YoY cc terms).

? EBIT margin decreased by 83 bps QoQ to 23.4% led by increase in Cost of Equipment (up 154% QoQ).

? Deal booking decreased as it reported TCV of $8.1bn for the quarter (vs $11.2bn in Q2FY24). North America TCV at $4.2 Bn; BFSI TCV at $2.6 Bn, Consumer Business TCV at $1.5 Bn.

? Net headcount addition was (5,680) employees in the quarter and closed at 603,305 employees. LTM attrition decreased by 160 bps QoQ to 13.3%.

? Declared dividend of Rs 27/ share (including special dividend of Rs 18/share); record date 19th January 2024.

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