TCS Q4 Results Review - Margins Surprise Positively: Systematix

Systematix Research Report

Tata Consultancy Services Ltd.'s Q4 print was a mixed bag, with revenue growth tad below our expectations and margins surprising positively. Management in its commentary indicated that growth in its key market of North America and banking, financial services and insurance vertical seems to have bottomed out and is gradually restoring, albeit it cannot say from which quarter.

We believe long-term trends in tech spending in BFSI (payment modernization, Basel III-related boost in risks and compliance, wealth management, etc.), ESG, cloud transformation and AI are intact, as customers are willing to use new technologies to reduce the time to market.

We expect growth opportunities in India, Latin America, and the UK markets to offset the weakness in north America and continental Europe for some time.

We have tweaked our FY25/FY26 estimates to build in 6% compound annual growth rate in revenue over FY23-26E from 7% earlier, factoring in growth recovery H2 FY25 onwards. Cost-related trends are intact and hence, we have not changed our margin estimates meaningfully.

We have also not included any benefits from price hikes the company has been taking, which provides additional margin lever, in our view.

Reiterating Buy rating with a revised target price of Rs 4,600 (Rs 4,575 earlier), based on 29.5 times FY26E earnings per share.

Key risks to our assumptions:

1. Abrupt exit/s from the leadership team,

2. sustained pressure on client discretionary spending in FY25/FY26,

3. non-encouraging outcomes of cost saving programs, etc.

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