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Near-term demand commentary remains muted; reiterate BUY

* TCS reported revenue of USD7.36b in 4QFY24, up 1.1% QoQ in constant currency (CC) terms, 110bp below our estimates but in line with Bloomberg consensus, despite ongoing demand weakness. The growth was driven by India (up 11% QoQ/37% YoY, aided by BSNL scale up) and the UK (up 3.6% QoQ), while North America and Continental Europe were weak. TCS reported its best quarterly deal TCV of USD13.2b (up 63% QoQ/32%YoY, book-to-bill ratio at 1.8x), including one mega deal. FY24 YoY CC USD growth was 3.4%.

*  The company maintained its strong operating margin performance, with EBIT margin up 100bp QoQ to 26.0%, the lower end of its medium-term guidance band for the first time in the last 12 quarters. This was 100bp ahead of our estimates, and was aided by lower subcontracting costs and continued cuts in headcount (-1.8k QoQ). Attrition (LTM) declined by 80bp QoQ to 12.5%. 4Q PAT was in line at INR124b (20.3% PAT margin). FY24 PAT stood at INR462b (up 9.3% YoY). TCS generated FCF of INR443b (up 6.9% YoY) during the year.

* The management outlook on the spending environment in IT services remains unchanged, despite some initial signs of pent-up demand, with a continued pause expected in discretionary deals in the near term. While the company expects FY25 revenue growth to be better than the low FY24 base, near-term quarterly growth commentary is still modest due to a focus on projects with high ROI and cost optimization.

* We continue to expect TCS to benefit in FY25 from the large BSNL deal execution. But continued uncertainty on growth pickup in North America and Europe is likely to weigh on overall growth, which we estimate at 8.8% YoY. Despite growing in single digits, TCS should be among the fastestgrowing large cap companies in our coverage universe. We factor in a USD revenue CAGR of 10.0% over FY24-26E.

* With 4Q EBIT margin surprising on the upside, TCS should deliver full-year EBIT margin of 25.6% in FY25, up 90bp YoY, despite limited incremental cost levers at its disposal. The growth recovery in 2HFY25 is likely to be driven by continued workforce optimization toward freshers and platforms. We expect FY25E/FY26E EBIT margins at 25.6%/26.4%, up from 24.7% in FY24.

* Excluding the one-off item, TCS has delivered INR PAT growth of 11% in FY24 and has INR470b in cash and investments. It announced a dividend of INR28 per share in 4Q, bringing the full-year payout at ~100% to USD5.6b.

* We have broadly maintained our FY25-FY26 EPS estimates. Over FY24-26E, we expect a USD revenue CAGR of ~10% and an INR EPS CAGR of ~15%. Our TP of INR4,600 implies 27x FY26E EPS, with a 15% upside potential. We reiterate our BUY rating on the stock.

Q4 revenues soft but margins above estimates, all-time high TCV

* USD revenue at USD7.36b, +1.1% QoQ CC and +2.2% YoY CC.

* Growth was driven by the UK and India, while NA continued to be a drag. Vertical growth was strong in Mfg and regional markets, while BFSI, Communications and Tech remained under stress.

* TCS reported its highest-ever deal TCV at USD13.2b (up 63% QoQ/32% YoY) vs. the peak of USD11.2b earlier (in 2Q). The book-to-bill ratio stood at 1.8x.

* EBIT margin came in at 26% (up 100bp QoQ), above our estimate of 25% and its highest in the last 12 quarters, driven by a third straight quarter of headcount decline (-1.8k QoQ, -13.2k in FY24) and lower SG&A costs. Subcon costs as % of revenue also declined by 150bp QoQ.

* PAT at INR124b (20.3% PAT margin) was in line with our estimate.

* TCS declared a dividend of INR28 per share in 4Q.

* FY24 YoY CC USD growth stood at 3.4%. PAT stood at INR462b (up 9.3% YoY). The company generated FCF of INR443b (up 6.9% YoY).

Key highlights from management commentary

* Deal momentum remained solid during the year. There was no change in tenure of deals. 55-60% of the deals were cost optimization deals, while the rest were transformation deals.

* Discretionary spending remains under pressure. Transformation projects will be funded through savings from cost optimization initiatives.

* Consumer vertical is seeing green shoots. Manufacturing remains robust. The pent-up demand in BFSI should drive growth over the near and medium term.

* Though early days, clients are inclined toward leveraging AI in application development, maintenance and deployment.

* Salary hikes announced for FY25 are similar to last year, with high performers getting double-digit wage hikes.

* Sub-con was a significant margin lever during FY24 and has bottomed out. Pricing and utilization remain key levers for margins going forward. Once growth returns, operating leverage should aid margins incrementally.

Valuation and view

* Given its size, order book and exposure to long-duration orders and portfolio, TCS is well positioned to withstand the weakening macro environment and ride on the anticipated industry growth.

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

* We maintain our positive stance on TCS. Our TP of INR4,600 implies 27x FY26E EPS, with a 15% upside potential. We reiterate our BUY rating.

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