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BFSI greenshoots visible; GenAI led TCV deals becoming mainstream

TCS reported revenues for Q2FY25 at $7.67bn, a growth of 5.5% YoY cc led by growth in Energy, Resources and Utilities and Manufacturing vertical and India, MEA, Asia Pacific and Latin America geographies. In USD terms, reported revenue was up 2.2% QoQ and 6.4% YoY. In INR terms, revenue stood at INR642.6bn, up 2.6% QoQ and 7.7% YoY. Q2FY25 order book TCV stood at $8.6bn (within the management’s comfortable guidance band of $7bn-9bn) with North America TCV at $4.2bn; BFSI TCV at $2.9bn and Consumer Business TCV at $1.2bn. Net CFO stood at 100.2% of net income in Q2.

* Strong traction in AI: Clients are focusing on initiatives that enhance their products and services through next-gen technologies like GenAI and IoT, aiming to boost productivity and operational efficiency. Key themes driving major deals include operating model transformation, vendor consolidation, legacy modernization, M&A, customer experience enhancement, digital workplace services, ER&D, identity and access management, and AI/GenAI initiatives. Growth has been particularly strong in AI.Cloud, Cyber Security, and TCS Interactive in Q2, reflecting a strategic emphasis on innovation and security in today’s competitive landscape. AI led TCV is almost doubling every quarter and becoming mainstream.

* Fresher hiring for FY25E on track: LTM attrition stood low at 12.3% (within comfortable band of 11-13%). There was a net addition of 5,726 employees resulting in workforce strength at 612,724. Company hired approx. 11.000 freshers from campuses and recalibrated hiring, focusing more on utilizing the capacity. The plans to hire closer to 40,000 freshers in FY25E as strategized earlier is on track. Company also commenced the campus hiring process for FY26E.

* Aspirational target band 26%+: Adjusted operating (EBIT) margins came in at 24.1% for the quarter (down 60bps sequentially and 20bps YoY). Margin impact was due to strategic investments in talent and infrastructure to ensure sustainable growth. Margin improvement levers are identified as improving productivity, utilization and pyramid rationalization (for short term) and improved realization (pricing) and growth acceleration (for long term). Company aspires its margin band to be between 26-28% going ahead.

* Management Outlook: Demand outlook continues to remain cautious as seen in the last few quarters. Key business themes seen across industries are cost optimization, vendor consolidation, customer experience transformation, supply chain modernization, risk and resiliency. Management is confident of FY25E to be better than FY24. Financial services in North America is showing signs of improvement. Manufacturing continues to see a strong demand environment with robust deal pipeline. Smart manufacturing and software-defined vehicles are the two major long-term trends. Under Life Science & Healthcare, we expect the headwinds to stabilize in Q3 and return to growth in Q4. Valuation: Company is investing significantly to create a large footprint in emerging growth markets. A near all-time high TCV and client interest in GenAI shall provide growth. We have introduced FY27E and expect Revenue/EBIT/PAT to grow at a CAGR of 10.3%/12.3%/12.2% respectively over FY24-FY27E. We maintain our rating to BUY with a revised target price of INR4,664 implying a PE of 30x on Sep-FY27E EPS of INR167

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