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TCS’s Q3 operating performance beat estimates – Revenue grew 1% QoQ (1.1% in CC terms) to USD7.28bn, slightly higher than our estimate of 0.8% QoQ CC growth. While the revenue growth was aided by ramp-up of the BSNL deal in Q3, it was partly offset by persistent weakness in discretionary spending and reprioritization of client spends. Adj. EBITM expanded by 70bps QoQ to 25% vs our estimate of 24.7%, aided by operating efficiencies, lower sub-contractor expenses and currency depreciation. Deal intake moderated a bit sequentially, albeit remaining healthy with TCV of USD8.1bn; book-to-bill stood at 1.1x. Deal wins were broad-based and dominated by cost optimization programs. Management remains watchful in the near term given macro uncertainties, and refrained from providing any timeline of recovery; but it expects acceleration in revenue growth once macro uncertainties recede. We cut FY24-26E EPS by less than 1.5%, factoring in the Q3 performance and EPIC legal case settlement. We maintain REDUCE with unchanged TP of Rs3,900/share, at 25x Dec-25E EPS.

Results Summary

TCS’s revenue grew 1% QoQ (1.1% QoQ/1.7% YoY in CC terms) to USD7.28bn, a tad higher than our estimate of USD7.24bn. Cost of equipment and software licenses increased by USD91mn QoQ, partly reflecting ramping-up of the BSNL deal. Adj. EBITM expanded by 70bps QoQ to 25%, on the back of efficiency improvements through productivity and realization (60bps), reduction in sub-contracting costs (70bps) and currency benefits (25bps), partly negated by headwinds from furloughs and higher thirdparty expenses (-80bps). Among geographies, North America declined 1.2% QoQ in USD terms, while the UK and Continental Europe grew 0.4% QoQ and 1.7% QoQ, respectively. India grew 25.7% QoQ, backed by the BSNL deal ramp-up. BFSI, Consumer Business, Communications & Media, and Technology & Services declined 1.8%, 0.3%, 1.9%, and 1.4% QoQ, respectively. Manufacturing, Lifesciences & Healthcare, Regional Markets & Others, and ERU grew 2.2%, 1%, 12.9%, and 2.8% QoQ. The company’s headcount declined 1% QoQ to 603,305 employees. What we liked: Operating performance beat, healthy cash conversion (OCF/EBITDA at 73.1%), further moderation in LTM attrition to 13.3%. What we did not like: Continued weakness in North America, BFSI, Consumer Business, Communication & Media, and Technology & Services.

Earnings Call KTAs

i) Company has noted cautious client behavior due to macro-economic uncertainties (fear of recession and continued high inflation) which creates a case of pent-up demand in the areas of hyper-personalization, channel modernization, point-of-sale, insights & recommendations driven by AI, supply chain, sustainability, intelligent operations, etc, as investments have not kept pace with requirements or business demand. Company expects the pent-up demand to materialize once macro uncertainties recede. ii) Clients continue to prioritize investments that accelerate cost reduction, drive business agility, and improve resilience across the supply chain. iii) AI.Cloud, cyber security, and cognitive business operations led the growth among service lines in Q3. iv) Company has commenced fresher hiring from campuses and continues to recalibrate lateral hiring, while focusing on driving utilization higher. v) Management remains committed to its 26- 28% EBITM aspirations. Utilization, productivity, subcon costs, pricing, pyramid, and automation remain the key margin levers. vi) BFSI was impacted in Q3 by the completion of large programs in North America, and expects the segment to retrace growth in Q4. Deal closures in BFSI remain broad-based. vii) The pricing environment remains stable. Realization improved due to higher productivity, better utilization, and use of tools. viii) TCS declared a dividend of Rs27/share (interim dividend: Rs9; special dividend: Rs18).

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