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Deal’ing with concerns

TCS’ 1QFY26 revenues declined 3.3% cc QoQ, missing estimates (JMFe: -0.6%). BSNL rampdown contributed 85% (-2.8%) of the decline, explaining majority of the miss. International business, albeit down 0.5% cc QoQ, was steady, given the environment. Deal wins (USD 9.4bn; book-to-bill: 1.3x) remained a bright spot. That said, strong deals in the recent past (LTM book-to-bill: 1.3x) have not translated into growth, implying weak revenue conversion – a key investor concern. Management attributes this to a combination of factors - pauses, rescoping, tenure extension etc. Decline of USD 50mn+ clients by 9 (6% of base) in past four quarters – highest ever – suggests challenge is secular. Client specific, such as Deutsche Bank decline, might be impacting too. Understandably, investors worry that TCS is losing wallet share to competition. We differ though. The panacea for all these – growth, wallet share gains - remains TCV, which TCS continues to win. Also, it is improbable that TCS is winning new deals but is unable to retain its current book of business. After all, similar pricing/deal construct should apply to renewal as well as new scope. We therefore believe TCS’ growth should improve once macro uncertainty lifts. That, along with undemanding valuation (22x FY27E), underpin our constructive view. BUY with a revised TP of INR 3,950.

* 1QFY26 – not that bad: Constant currency revenues declined 3.3% QoQ vs JMFe/Cons est. of -0.6%/-1.4%. India revenues declined 32% QoQ as first phase of BSNL roll-out concluded. International revenues declined 0.5% cc QoQ. North America grew marginally while UK and EU dragged. Completion of one large engagement in EU BFSI weighed. Despite that, BFSI was steady (-0.5% cc QoQ) as US and UK BFSI held up. EBIT margins expanded 30bps QoQ to 24.5%, ahead of estimates (JMFe: 24.1%). Lower third party, linked with BSNL) aided margins by 70bps, which was offset by higher employee expenses due to lower utilisation and higher variable comp. Capacity addition (+5,090 QoQ) proved untimely as demand contracted, impacting utilisation. Higher other income and lower tax rate however aided 5% beat on PAT (INR 128.19bn). DPS was INR 11.

* Outlook - gradual recovery?: Deal wins increased 13% YoY to USD 9.4bn, at a book-tobill of 1.3x. Deal pipeline remains healthy too, though led by cost takeouts and vendor consolidation opportunities. Management indicated demand contraction through the quarter. Clients resorted to pauses, rescoping, tenure extensions and slower starts, driving weaker revenue conversion. That said, TCS has not seen project cancellations. TCS believes impact of such delays are largely in the base and expects Q2 to be better than Q1. New BSNL contract (c.USD 340mn TCV) should help too, subject to purchase orders getting signed. It also reiterated its earlier stance that FY26’s international revenues should be better than FY25’s. Despite BSNL-headwind and a still non-conducive growth environment, it expects to improve margins from hereon.

* EPS little changed; Maintain BUY: We have marginally lowered our FY26/27 cc growth by 75/100bps on 1Q miss. Our FY26E EPS is up 1% on better margins and higher other income. FY27E EPS is however down 2% on lower growth assumptions. We continue to value the stock at 25x to arrive at our INR 3,950 TP (from INR 4,030).BUY.

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