Infosys, TCS Q3 Results Review - Inline Performance: HDFC Securities

HDFC Securities Institutional Equities

TCS - Path to recovery

Tata Consultancy Services Ltd. delivered in-line revenue growth and stronger operating performance in Q3. Key positives for TCS included-

1. growth visibility from mega deals (Q3/Q4 sequential improvement from BSNL deal and JLR deal) and deal market-share gains versus Accenture outsourcing, offsetting the impact of leakage in the renewals,

2. commentary on recovery in Europe geography and banking, financial services and insurance vertical (sequential growth even in Q3 adjusted for impact of large program completion), supported by 16% YoY in BFSI total contract value for nine months-FY24, vendor consolidation deals plus sequential improvement in qualified pipeline and strongest book-to-bill in retail and consumer packaged goods vertical in over a year, and

3. margin improvement and continued scope for improvement aided by declining attrition (within comfort range), sub-con optimisation and higher scope for utilisation (13% growth in learning hours).

Our target price of Rs 4,040 is based on 26 times FY26E earnings per share (five year/10Y average at 26 times and 23 times).

Infosys - Near-term upside capped

Infosys Ltd. delivered in-line performance (above consensus) while underperforming TCS sequentially and for FY24E growth.

The cut/narrowed guidance implies only marginal growth at the top-end in Q4 despite the benefit from the Liberty Global deal ramp-up and normalisation of the McCamish impact. The relative weakness is emanating from-

1. a higher mix of discretionary services in Infosys’ portfolio with slower activity on digital programs, a steep decline in Top 11-25 accounts and pressure on renewals (sub-$1 billion large deal renewal total contract value as compared to $1.5 billion quarterly average),

2. extended furlough impact in Q4 and increased competition from captives, and

3. attrition in senior management to competition.

Revenue guidance for FY24E was tweaked to 1.5 to 2% CC (1 to 2.5% earlier) and margin guidance was maintained.

The improving trajectory beyond FY24 is premised on-

1. benefits from project ‘Maximus’ driving margin improvement – utilisation, pricing, pyramid, delivery efficiency,

2. new deal wins around cost optimisation, SAP cloud, and

3. relative strength in manufacturing and energy and utilities verticals (28% of revenue).

Near-term upside potential is capped especially if macro recovery is protracted. Maintain 'Add' on Infosys with target price of 1,515 based on 20 times FY26E EPS.

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