Tata Consultancy Services (TCS) reported revenue growth of 2.6% QoQ USD terms (3.2%QoQ CC) and margins of 25% in line with our estimates. Revenue growth was broad-based across verticals with communications, BFSI and retail leading the growth. TCV was strong at US$11.3bn (all-time high) growing 49% QoQ and 23% YoY- partly aided by two mega-deals of ~US$1 bn each.
Company benefited on margins from reduction in travel costs in Q4FY22 (down from 0.94% of revenue to 0.50%). Apart from travel costs, every cost item moved up for TCS during the quarter. We believe these costs will further increase as companies may plan to return workers to offices (travel, facility, communications). Though TCS has better-than-peers’ supply-side management, upcoming salary hikes, retention costs and wage inflation will add to the headwinds on margins.
We would like to highlight that employee addition remained strong (+35k) in Q4 with average of 23k in past three quarters, which still showcases strength in demand. Attrition rate on ltm basis increased further to 17.4%, an increase of 210 bps QoQ and 1,020 bps YoY. Demand remains democratic in nature, but its fulfilment will come at a cost, which will further dampen the earnings momentum. Talent shortage will continue even as the IT industry has added a record number of freshers. High cost to backfill attrition and retain talent will leak into margins across companies. Talent constraint exists not only offshore, but onsite as well. Tailwinds will be back-ended & headwinds will be upfront.
We are forecasting revenue growth of 11.2%/10.1% and margins of 24.8%/25% for FY23E/FY24E respectively. TCS has better-than-peers’ supply-side management, breadth of capabilities and deep domain capabilities, but the stock is trading at 28.3x on FY24EPS with PEG of 2.4x – this leaves limited room for upside. We reiterate our HOLD rating on account of slowing earning growth and elevated PEG ratios with a fair value of Rs3,519 based on 27x FY24E earnings. Our estimates remain intact.
- Inline revenues: TCS reported revenues of US$6,696mn, up 2.6% QoQ USD, 3.2% QoQ CC. US led with 4.5% $ growth, growth slowed down in Continental Europe on expected lines due to anniversary of a couple of large deals, which had ramped up in Mar 2021. Growth was led by communications & media (+5.8% QoQ USD) followed by retail & CPG (+4.7% QoQ USD). Manufacturing and Life sciences grew 3.7% QoQ USD each while BFSI reported tepid growth of 2% QoQ USD. Regional markets remained flat. For the full year, TCS crossed US$25bn in revenues, up 15.4% YoY in constant currency terms.
- Margins remained stable sequentially. Margins came in at 25%, in line with estimates. The quarter witnessed headwinds from tactical interventions (-70bps) and sub-con costs (-20bps), which were offset by operational efficiencies and currency fluctuations (+10bps). Management indicated their intent to give wage hikes as per normal cycle starting from 1st April. TCS will face headwinds in the form of higher wage costs due to elevated attrition and return of discretionary expenses as majority of employees return to pre-Covid mode of working. Attrition rate on ltm basis increased further to 17.4%, an increase of 210 bps QoQ and 1,020 bps YoY. TCS expects to give 6-8% hike in India, similar to the last year, we believe expectations will have an upward bias.
High cost to backfill attrition and retain talent will leak into margins across companies. Talent constraint exists not only offshore, but onsite as well. Tailwinds will be back-ended & headwinds will be upfront.
- Order book at all-time high. Orderbook for the quarter stood at US$11.3bn (all-time high). BFSI reported deals worth US$3.2bn, retail US$4.6bn and North America US$6.1bn. Deal wins include two mega deals of ~US$1 bn each, cumulatively adding up to ~US$1.8 bn. Deal TCV of US$9.5 bn ex-mega deals is strong and increased 3.3% YoY and 25% QoQ. Deal tenures are in the 7-10 year range implying cumulative average ACV of ~US$200 mn over the deal tenure. For the full year, TCV grew 9.5% YoY.
We believe the magnitude of growth contribution of mega deals will be lower in FY23E on account of elevated supply side pressures.
- Hiring spree continues. TCS reported its highest-ever net addition during the quarter (~35k). Though attrition rose on LTM basis, on a quarterly annualised basis the number is plateauing and is expected to start tapering in a couple of quarters. For FY23, management has targeted to hire ~40k freshers.
TCS plans to bring 80% of workforce back to offices before initiating the move to 25*25 operating model. They have started gradual shift to office starting with 50,000 senior associates and expects majority of workforce to return to office by middle of FY23.
- Other highlights. Company reported a robust OCF/NI of 111% and declared dividend of Rs22 per share.
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