TCS Q3 Results Review - Beat On All Fronts; Demonstrated Superior Execution: Axis Securities

Axis Securities Report

In Q3 FY24, Tata Consultancy Services Ltd. reported revenue of Rs 60,583 crore, up only 1.5% on a QoQ basis (in rupee terms), owing to weakness in discretionary spending. On a YoY basis, it posted revenue growth of 4%.

The company reported operating profits of Rs 15,155 crore and operating margins of 25%, up 70 basis points QoQ. This was on account of better execution, strong volume growth, and reduced sub-con cost.

Attrition levels dropped by 160 bps to 13.3%, but it continues to loom concerns over the company’s execution efficiency in the future.

The management commentary on the verticals such as banking, financial services and insurance, hi-tech media, life sciences, and tetail was cautious.

Furthermore, it expects the company to report moderate growth in the near term.

On a brighter note, deal-wins for the quarter continued strong and remained high. Moreover, deal wins were spread across verticals and geographies and stood at $8.1 billion (BFSI total contract value at $2.6 billion; consumer business TCV at $1.5 billion).

However, TCS expects technology spending to remain resilient and expects the secular tailwinds to drive healthy growth over the medium to long term.

Outlook

From a long-term perspective, we believe TCS has built a resilient business model by securing multiple long-term contracts with the world’s leading brands. It has also established robust capabilities that will enable it to gain market share moving ahead.

However, prevailing uncertainties in large economies continue to pose short-term headwinds to the company’s growth prospects. Nonetheless, we believe discretionary spending will gradually increase with newer technologies moving forward.

Valuation and recommendation

We recommend a 'Hold' rating on the stock and assign a 25 times price/earning multiple to its FY26E earnings of Rs 162.55/share to arrive at a target price of Rs 4,075/share, implying an upside of 9% from the current market price.

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