TCS Q4 Results Review - FY25 To Be Better But Not By Much: Nirmal Bang

Nirmal Bang Report

Tata Consultancy Services Ltd. retained its stance that FY25 will be a better year than FY24 and we think so too but not by much. 5.4% US$ revenue growth versus 4.1%. 1.8% compound quarter growth rate versus 0.6%. 

Despite better visibility compared to previous quarters, a 25% higher total contract in FY24 (with better net new and more short cycle orders) and broader pick-up in growth across verticals, the management sounded cautious as it sees customers reducing scope of or pushing out existing contracts (especially those signed during the pandemic) due to macro uncertainty (interest rates, inflation, geopolitics, elections, regulations, etc).

TCS did not want to be drawn into a discussion on H1 versus H2 trajectory or when exactly the turn in demand would happen in FY25.

TCS revenue growth in Q4 FY24 in constant currency terms was up 1.1% QoQ - in line with our estimate while Ebit margin expansion of 100 basis points QoQ was better than our estimate by 40 bps. TCV of $13.2 billion (including one mega deal – Aviva) was a big positive and the highest in its history.

TCS stated that revenue could have been 50-100 bps higher had it not been for customers cutting back on existing projects.

With subcontractor costs almost bottoming out at 4.86% of revenue and headed higher in the coming quarters, TCS indicated that improved pricing will remain a key lever for incremental margin expansion.

Utilisation, productivity, and pyramid too will act as levers going forward. However, in the current challenging market conditions, we think getting meaningful price increases will be difficult.

Post Q4 FY24, we have tweaked our revenue and EPS estimates marginally upwards for FY25-FY27 considering the higher TCV and margin outperformance.

We remain ‘underweight’ on the IT sector (since April 2022) and maintain a ‘Sell’ on TCS due to its rich valuation.

We believe that we are in a ‘slower for longer’ kind of a scenario. While we believe TCS can deliver steady growth, the best margins, strong return on invested capitals and cash flows in the tier-I space, USD growth beyond FY26 (when we see a pent-up demand driven spike) will settle at 5-7% compound annual growth rate.

We it at 23.7 times March-26E EPS. 23.7 times is the historical five-year mean less 1SD.

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