Tata Consultancy Services Ltd. (TCS) revenue rose on deal wins but analysts are cautious as margin pressure persists and the company hinted at recession worries among clients.
The company’s revenue rose 4.28% sequentially to Rs 52,758 crore in the first quarter. The largest Indian IT services company saw its EBIT margin contract to 23.1% in the quarter ended June from 24.96% in the preceding three months.
The company won new deals worth $8.2 billion in April-June period compared with $11.3 billion in Q4. “This quarter the company won a “couple of $400 million and other medium deals,” Chief Operating Officer N Ganapathy Subramaniam said.
It net added 14,136 employees during the quarter.
Key Q1 Highlights (QoQ)
- Net profit fell 4.5% to Rs 9,478 crore
- Operating profit fell 3.5% to Rs 12,186 crore
- Revenue in dollar terms rose 1.3% to $6,780 million
- Revenue growth in constant currency terms stood at 3.5% sequentially.
Here’s what brokerages have to say about TCS’ Q1 performance:
HDFC Securities
- Maintains ‘Add’ (5-15% return potential) with target price of Rs 3,620, implying a 10.8% upside potential.
- TCS delivered an in-line performance and horizon-1 to continue to be near-term volume driver.
- TCS witnessed strong bookings in banking, financial services and insurance ($2.6 billion in Q1 FY23 up 18% yoy) and gains in deal market-share (1.2 times book-to-bill versus 1.1 times for Accenture outsourcing and 1.05 times of Accenture overall)
- TCS has stronger demand environment in North America in comparison with Europe.
- We expect increased volume of vendor consolidation/multi-service deals.
- Also expect margin trajectory to improve; Q4 FY23 margins to reach Q4 FY22 level.
Dolat Capital
- Maintains ‘Reduce’ (expecting annual total return of 0-10%) with target price of Rs 3,320, implying a 2% upside potential.
- TCS reported revenue growth of 3.5% QoQ in constant currency terms (our estimate: 3.6%) led by banking, financial services and insurance, retail consumer packaged goods and life sciences.
- Deal wins stood at $8.2 billion, taking the trailing 12 months total contract value to $34.7 billion (up 6.1% yoy) with 1.32x revenue coverage, reflecting some slowing down of momentum (1.41 in yoy period).
- While management is optimistic on deal pipeline, we believe
deal/growth commentary would have served better with aspirational
goals or color on growth resilience. - Achieving 25% operating profit margin for FY23 would necessitate a more robust growth rate, which appears difficult at present.
IDBI Capital
- Maintains ‘Hold’ with a target price of Rs 3,110, implying a 5% downside potential.
- TCS results were below our estimates mainly on profitability front. In addition, although the company is witnessing healthy deal pipeline of US$8.2 billion, we expect the book-to-bill ratio to taper.
- In the near term, the brokerage expects the company’s revenue growth to remain robust as the impact of macro’s will be felt post two quarters.
- Considering the high inflation and recession fear, the brokerage is cautious on revenue growth outlook.
- Revised our dollar revenue estimates and now expect it to increase at a CAGR of 9% over FY22-FY24.
- Expects supply-side challenges including wage hikes, higher travel and facility costs to impact near-term margins (FY23).
