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Tata Consultancy Services: The contrast between strong deal wins and growth deceleration indicates a slightly protracted recovery ahead for Tata Consultancy Services (NS:), as discretionary projects remain challenged. However, following two-quarters of flat sequential growth, we expect a sequential growth recovery from Q4FY24E, supported by a ramp-up of mega deals (a bigger boost to FY25E growth). This is also reflected in deal market share gains by TCS (30% higher bookings than Accenture’s managed services in the last two quarters).
TCS’ YoY growth trajectory will pick up from Q1FY25E, taking FY24E growth of 4% CC to >7.5% CC in FY25E, supporting EPS growth of 9% and 12%. The decline in net headcount and sub-contracting reduction are indicative of near-term softness and we marginally tweak estimates to factor in the near-term growth softness. Our TP of INR 3,800 is based on 26x Sep-25E EPS (5Y/10Y average at 26x,23x).
Chugging Along
The contrast between strong deal wins and growth deceleration indicates a slightly protracted recovery ahead for Tata Consultancy Services (TCS), as discretionary projects remain challenged. However, following two-quarters of flat sequential growth, we expect a sequential growth recovery from Q4FY24E, supported by a ramp-up of mega deals (a bigger boost to FY25E growth). This is also reflected in deal market share gains by TCS (30% higher bookings than Accenture’s managed services in the last two quarters).
TCS’ YoY growth trajectory will pick up from Q1FY25E, taking FY24E growth of 4% CC to >7.5% CC in FY25E, supporting EPS growth of 9% and 12%. The decline in net headcount and sub-contracting reduction are indicative of near-term softness and we marginally tweak estimates to factor in the near-term growth softness. Our TP of INR 3,800 is based on 26x Sep-25E EPS (5Y/10Y average at 26x,23x).
Q2FY24 highlights: (1) TCS’ revenue print stood at USD 7.2bn, +0.1% QoQ CC and +2.8% YoY CC, with YoY growth moderating from 7% in Q1FY24. (2) Deal bookings were the key highlight, with a TCV of USD 11.2bn, 10% QoQ and 38% YoY, which included BFSI deals at USD 3bn (similar to Q1) and NorthAm bookings at USD 4.5bn (lower than last two quarters); deal wins included two mega deals of USD 1bn each. (3) Within verticals, growth was led by manufacturing and energy & utilities, while the sequential decline was due to communication & media and retail & CPG verticals.
(4) TCS’ EBITM improved 110bps QoQ to 24.3% (in-line), supported by productivity and efficiency measures such as lower sub-contracting (+50bps margin impact). (5) TCS announced a buyback of INR 170bn at a price of INR 4,150 per share (1.1% of total shares), which is in sync with its capital allocation policy.
Outlook
We have factored 3Q/4Q sequential revenue growth of 1% and 2% respectively, with 100bps from the JLR/BSNL deal in Q4 and regional market seasonality supporting +50bps in Q3. FY24/25/26E USD revenue growth factored at 4.4%, 7.6, and 7.2%, with EBITM at 24.3%, 25.0%, and 25.0% respectively, translating into 10% EPS CAGR over FY23-26E. FCF & payout yield at ~4% and RoE 50% will support valuations 25x and 23x FY25/26E (10Y average at 23x).
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