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TCS reported Q2FY24 revenues at $7,210mn (below our estimates), up 4.8%YoY in USD terms and 2.8%YoY in CC terms. In INR terms, revenue stood at INR596.9bn, up 7.9% YoY and 0.5% sequentially. Q2FY24 order book TCV stood second highest ever at $11.2bn led by robust North America order book at $4.5bn and BFSI order book at $3.03bn. Book-to-Bill ratio came at 1.6 for Q2FY24. Net CFO stood at 104.2% of net income to INR118.2bn.

* Q2 growth led by UK geography and Energy & Utilities vertical: Q2 revenue was neutralized by reduction in the revenue base as the transformation projects got completed. However, growth was led by UK geography (+10.7% YoY), Energy, Resources and Utilities (+14.8%), Manufacturing (+5.8%) and Lifesciences & Healthcare vertical (+5%). Geographically, management sees maximum caution in North America and Continental Europe. Middle East and Africa grew 15.9%, Latin America grew 13.1% and Asia Pacific grew 4.1%.

* Honouring all trainee offers: LTM attrition stood at 14.9% (down 290 bps sequentially). There was a net addition of -6,333 employees resulting in workforce strength at 608,985. Company has recalibrated hiring, keeping it below the deposits to drive productivity and enhance project outcomes. Management is proactively hiring freshers and trainees and is investing in training in them.

* Margins target band 26%+: Operating margins in Q2FY24 expanded 110bps sequentially to 24.3% mainly due to disciplined execution which resulted in improved utilization and productivity and further optimization of sub-contract expenses. Company also benefitted from driving efficiencies in discretionary expenses. Management also mentioned that getting employees to work from office wont impact margins as it is continuously investing in infrastructure. Improved utilization and optimization of sub-contract expenses will help company expand its operating margin going forward. Management aspires the margin band between 26-28% going ahead. Net margin came in at 19% for Q2FY24.

* Management Outlook: Management is cautious of slower discretionary spends and expects H2 to be worse than H1. Europe turned out to be positive and order book in Europe appears to be good for long term. Quarterly TCV expectation range has been upgraded to $9-10bn range from earlier $7-9bn range. Clients continue to prioritize business agility and cost optimization initiatives even while exploring innovative uses of Gen AI. Clients are also focused on operating model transformation, vendor consolidation and Enterprise IT as a Service.

* Valuation: The resilience of demand for services, commitment to long tenure programs and the continued appetite for experimentation with Gen AI and other new technologies boosts confidence in longer-term growth prospects. We have introduced FY26E and expect Revenue/EBIT/PAT to grow at a CAGR of 8.3%/9.5%/9% respectively over FY23-FY26E. We upgrade our rating to ADD with a revised target price of INR4,040 implying a PE of 25x (unchanged) on FY26E EPS of INR162

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