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3Q beats estimates despite demand constraints

No change in spending commentary; reiterate BUY

*TCS reported revenue of USD7.28b in 3QFY24, up 1.0% QoQ in constant currency (CC) terms and 140bp above our estimates despite a weak demand environment and seasonal weakness. The growth was aided by strong India performance (up 26% QoQ, partially aided by BSNL deal execution). TCS reported deal wins of USD8.1b (down 28% QoQ but up 3% YoY, book-to-bill ratio at 1.1x), in line with our expectations.

* EBIT improved 70bp QoQ to 25.0%, 50bp ahead of our estimates, aided by lower subcontracting costs and cost savings, which more than compensated for adverse seasonality. 3Q headcount declined 5.7k (-1% QoQ). Attrition (LTM) declined by 160bp QoQ to 13.3%. TCS expects attrition to continue to soften in the near term. Reported PAT was negatively impacted by a onetime cost of USD115m associated with legal payout to Epic System.

* Management commentary regarding the spending environment in IT services remains unchanged, with continued pause in discretionary deals adversely affecting business. While the company views its deal pipeline and booking as robust, it continues to expect improvement in client sentiment after the positive commentary by the US Fed in Dec’23.

* In the near term, North America and BFSI were hit by furloughs and project completions in 3Q. TCS expects the vertical to return to growth in 4Q. With tailwinds from BSNL and good LTM deal wins (USD39.5b, up 12% YoY), we expect TCS to be among the few large-cap companies to grow in double digits in FY25 (est. 10.5% YoY CC) and we factor in a USD revenue CAGR of 9.0% over FY23-26E.

* 3Q EBIT margin beat of 50bp QoQ was surprising given the expected margin drag from the BSNL deal, which scaled up during the quarter. With the continued optimization of workforce and ongoing moderation in attrition, the pressure on operating margin should further ease, helping it improve EBIT margin over the next two years. We expect FY25E/FY26E EBIT margins to be at 25.1%/26.2%, up from 24.4% in FY24. This suggests that TCS will touch the lower end of its long-term margin guidance (26-28%) by 4QFY25.

* Excluding the one-off item, TCS has delivered INR PAT growth of 11% in 9MFY24. It generated FCF of INR103.5b in 3Q and had INR457b in Cash and Investments as of 3QFY24. The company announced a dividend of INR27 per share in 3Q, including a special dividend of Rs18 per share.

* We have kept our FY24 EPS estimate unchanged but have raised FY25-FY26 EPS estimates by ~2.0%. Over FY23-26E, we expect a USD revenue CAGR of ~9% and an INR EPS CAGR of ~14%. Our TP of INR4,250 implies 25x FY26E EPS, with a 14% upside potential. We reiterate our BUY rating on the stock.

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