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TCS -Strong deal flow to compensate for low near-term visibility

Tata Consultancy Services Ltd. reported in-line revenue of $7.2 billion in Q1 FY24, flat QoQ in constant currency and a tad below our estimate of 0.3% CC. Revenue growth was affected by broad-based demand weakness across key verticals (banking, financial services and insurance) and geographies (U.S.).

The management indicated that a demand slowdown due to macro concerns is leading to reprioritisation of deals, which is resulting in pauses and deferrals in non-critical projects. While the deal pipeline and deal wins (Q1 deal total contract value of $10.2 billion, book-to-bill at 1.4 times) are good, smaller discretionary projects are getting impacted.

Q1 Ebit margin declined by 130 basis points (to 23.2%) due to seasonal wage hikes and was in line with our estimate. The management expects margins to improve gradually over the next three quarters, in line with past trends.

TCS remains cautious about near-term demand amid adverse macros, while it is quite optimistic about the secular long-term trend. The weakness persists in verticals like BFS, communication and retail due to a slowdown in discretionary spending, while the focus is shifting to efficiency-driven projects.

The management also indicated that the small deals are getting scrutinised and taking more time to ramp up. However, the company was able to maintain its deal total contract value at $10.2 billion in Q1, which we see as a key positive and differentiator for TCS.

For report,


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