TCS Q3 Results Review - Deal Wins Muted, Hope Intact; Cost Optimisation Continues: Dolat Capital

Dolat Capital Report

Tata Consultancy Services Ltd. reported 1.2% revenue growth in constant currency terms (our estimate: +1.1%) led by sustained QoQ traction in manufacturing (+2.2%), energy and utility (+2.8%) and regional mkt (+12.9% – led by BSNL deal). Decline in key verticals (banking, financial services and insurance -1.8%; retail -0.3%) continued.

Adjusted operating profit margin up 70 basis points QoQ at 25% (our estimate: 24.8%), led by 60 bps from productivity and realisation, 70 bps from sub-con optimisation, 25 bps forex offset by 80 bps headwinds from third-party expense and furloughs.

Operating profit margin gains were effectively led by further reduction in headcount by 1% QoQ.

Total contract value wins stood at $8.1 billion taking trailing twelve months TCV to $39.5 billion (up 11.6% YoY). Management pointed deal wins remain healthy and ramping up as planned. Company is also estimating of pent-up demand building up in few segments.

TCS' results were largely non-event both from current quarter as well as outlook perspective on demand environment. However, improved focus on OPM optimisation is driving up some earnings growth.

Maintain 'Reduce' rating with target price of Rs 3,750 valued at 25 times on FY26E earnings per share (implies three times on PEG basis).

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