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BSNL ramp-up continues to fuel growth

US BFSI recovery on track

* TCS reported revenue of USD7.6b in 2QFY25, up 2.2% QoQ in USD terms, beating our estimate of ~1.6%. Growth was driven by India (up 21.3% QoQ/93.2% YoY, aided by BSNL ramp-up) and UK (up 2.8% QoQ), while North America was down 1.7% QoQ. EBIT margins came in ~40bp below our estimate at 24.1%. PAT was down 1.2% QoQ/up 5.1% YoY at INR120b (4.1% below our est. of INR125b). For 1HFY25, TCS’s revenue/EBIT/PAT increased by 6.5%/9.5%/6.8% compared to 1HFY24. FCF conversion came in at 86% for 1HFY25 vs. 95% for 1HFY24. TCS reported a deal TCV of USD8.6b, within its usual range, up 4% QoQ and down 23% YoY. The book-to-bill ratio was 1.1x.

* Our View: Growth was primarily driven by the BSNL ramp-up (excluding India, growth was 0.7% in USD terms vs. 2.2% overall). The decline in North America was surprising, but this was attributable to client-specific issues in healthcare and persistent weakness in communications vertical. Last quarter marked a significant shift in client behavior, as the recovery in the US banking sector started taking shape—a trend that continued into this quarter’s commentary too. Admittedly, there was little in the way of incrementally positive outlook as compared to 1Q, and the precarious geopolitical landscape and continued macro uncertainty could keep the recovery range-bound. We reiterate that a J-curve recovery may not materialize, but as we noted in our thematic report (Technology: Bounceback! Charting the path to revival for IT services), clients are gradually returning with renewed interest in core and ERP modernization projects.

* On margins, the 60bp decline in EBIT margin was driven by higher passthrough revenues (up 160bp QoQ). The BSNL ramp-up, according to the management, is now at its peak, and headwinds from this ramp-up should recede. With wage hikes behind and TCS’s best-in-class pyramid, we expect margins to improve sequentially.

* We believe the BSNL deal and other large deal ramp-ups should support TCS’s revenue growth in FY25. However, geopolitical risks and current macro uncertainty continue to slow the recovery in client spends. We believe some of these headwinds should recede in 2HFY25.

* We keep our estimates largely unchanged. Over FY24-27E, we expect a USD revenue CAGR of ~7.6% and an INR EPS CAGR of ~10.9%. Our TP of INR5,400 implies 33x Sep’26 EPS, with a 28% upside potential. We reiterate our BUY rating on the stock.

Key highlights from the quarter

* USD revenue came in at USD7.6b; YoY CC growth was 5.5%.

* 2Q growth was driven by Energy & Utilities, Growth Markets and BFSI. North America declined by 1.7% QoQ. BFSI sustained its growth momentum (up 1.9% QoQ), whereas Communications and Media remained under pressure. Life Sciences declined QoQ due to client-specific issues.

* EBIT margin was 24.1% (down 60bp QoQ), below our estimate of 24.5%.

* Attrition (LTM) increased by 20bp QoQ to 12.3%. PAT was down 1.0% QoQ/ up 5.0% YoY at INR120b (4.2% below our est. of INR125b).

* The net headcount addition was 5,726 employees (up 1% QoQ) in 2QFY25. ? TCS declared a dividend of INR10/share in 2Q.

Key highlights from management commentary

* Given the uncertain macro environment, clients are focusing on realizing immediate benefits.

* Overall, demand remained stable compared to the last quarter. Two to three client issues led to slightly muted growth. This headwind should normalize in the upcoming quarter.

* Expect growth markets like India, EMEA, and Asia Pacific to be sustainable growth drivers for TCS going forward.

* Globally, clients continue to prioritize efficiency through cost transformation programs, and demand for discretionary deals with low immediate ROI remains relatively subdued.

* Despite an uncertain geopolitical situation, the biggest vertical, BFSI, showed signs of recovery. TCS also witnessed a strong performance in growth markets.

* The company is seeing continued momentum in AI/GenAI adoption, with the underlying technology maturing rapidly. There are now over 600 AI/GenAI engagements, either deployed successfully in production or in various phases of development.

* TCS expects the furlough situation to remain the same as last year.

* On the cloud front, TCS continues to see good growth in legacy modernization, data platform modernization, and technology landscape simplification.

Valuation and view

* Given its size, order book and exposure to long-duration orders and portfolio, TCS is well positioned to grow over the medium term.

* Owing to its steadfast market leadership position and best-in-class execution, the company has been able to sustain its industry-leading margin and demonstrate superior return ratios.

* We maintain our positive stance on TCS. Our TP of INR5,400 implies 33x Sep’26E EPS, with a 28% upside potential. We reiterate our BUY rating on the stock..

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