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Margin improvement encouraging; reiterate BUY

* TCS reported revenue of USD7.2b (-0.2% QoQ) in 2QFY24, up 0.1% QoQ in constant currency (CC) and below our estimate of 1.1% CC QoQ. Revenue growth was affected by continued slowdown across key verticals (BFSI/Retail) and geographies (US/Europe). The weakness in revenue growth was majorly led by continued slowdown in discretionary spends and clients reprioritizing cost optimization projects. However, the deal momentum remained strong as TCS recorded the second-highest ever deal TCV of USD11.2b in 2Q, with a book-to-bill ratio of 1.6x.

* 2Q EBIT margin improved by 110bp to 24.3% due to the recalibration of gross hiring, which led to a sharp drop in headcount by ~6.3k, coupled with incremental measures to rationalize the pyramid and optimize subcon expenses in 2Q. The management has suggested that it has further scope for improvement in utilization and productivity as freshers are deployed and repurposed into projects.

* Overall, client engagement remained strong and TCS continued to chase multiple opportunities, as seen in robust deal wins in 2Q. However, macro uncertainties continued to weigh on client spending in discretionary areas, resulting in tepid near-term growth expectations. Additionally, the company witnessed the closure of a few large projects during the quarter, which further impacted its performance.

* While TCS management has indicated that client spending remains muted in the near term, it is seeing definite signs of macro recovery and improvement in client engagement over the medium term. Given continued uncertainty in the demand environment in FY24, we have cut our estimates (partially offset by an accelerated revenue conversion of the mega BSNL deal). We continue to expect TCS to deliver superior growth in FY25 among our Tier 1 coverage, driven by its leadership in cost efficiency, which has led to strong deal inflows in recent quarters. We expect the trend to continue, providing better visibility for FY25 revenue growth despite an uncertain demand environment. We factor in a USD revenue CAGR of 7.6% over FY23-25E.

* With a sharp recovery in 2Q EBIT margin performance, TCS should benefit from its scale and ability to optimize talent to control costs in the near to medium term. This is especially visible in the fact that it has given timely increments despite growth concerns, which we expect to pay out over the medium term through easing attrition. This should allow it to deliver a 12.2% PAT CAGR over FY23-25E. * We have trimmed our FY24/FY25 EPS estimates by 0.7%/1.8%. Our TP of INR4,060 implies 28x FY25E EPS (12% upside). Reiterate BUY on the stock.

Muted Q2 revenue growth but good margin improvement

* Revenue growth (CC) was 0.1% QoQ. INR EBIT/PAT rose 9% each YoY.

* EBIT margin of 24.3% (up 110 QoQ) beat our estimates of 24.1%, mainly due to cost efficiency measures and lower employee count (-6.3k QoQ).

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