'Add' TCS On Large Deal Wins; 'Reduce' Tata Elxsi On Weak Quarter, Says HDFC Securities After Its Q3 Results

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HDFC Securities Institutional Equities

Tata Consultancy Services - Deal momentum picks up

Tata Consultancy Services Ltd. delivered in-line revenue growth and operating performance in Q3, albeit with a pick-up in deal wins (best book-to-bill for Q3 and Q4 traditionally being strongest in bookings). Key positives for TCS include-

1. strong total contract value of $10.2 billion, driven by large deal wins across various markets and industries,

2. positive commentary on broad basing of discretionary spend beyond the BFSI vertical,

3. management’s outlook of CY25 growth to be better than CY24 (despite the impact of BSNL deal), supported by increase in successful deployment of GenAI engagements,

4. TCS’ full stack capabilities and growth across managed services, operating model transformation, vendor consolidation, legacy modernization, CX transformation, and GenAI-led transformation, and

5. higher fresher addition next year indicative of better visibility.

BSNL deal tapering-off in FY26E will impact growth (improve margins), even as discretionary spend recovers. Our target price of Rs 4,590 is based on 28 times FY27E EPS (five years average at 27x).

Tata Elxsi - Weak Q3

Tata Elxsi Ltd.’s performance was weak, impacted by a sharp deceleration in the Transportation vertical. While the Q3 aggregate revenue performance was similar to Q2, the constituents flipped – deceleration in (high growth) Transportation versus short-term impact of Healthcare weakness earlier.

Business challenges in the automotive vertical (particularly Europe) led to the delay in new deal closure and reflected in the decline of tier-1 sub-segment. While Tata Elxsi’s recent deals in APAC region, higher mix of OEM and partnership with Qualcomm will improve the growth trajectory, core geography’s outlook can delay the recovery.

FY25E will be the third successive year of revenue growth deceleration of Tata Elxsi and second successive year of profit deceleration. While this trajectory is expected to improve over FY25-27E, its visibility has reduced (as compared to concentrated growth mix in prior period). Maintain Reduce on Tata Elxsi with a lowered target price of Rs 6,190, based on 35x FY27E EPS.

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