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Motilal Oswal Report
Tata Consultancy Services Ltd. reported revenue of $7.20 billion in Q4 FY23, up ~0.6% QoQ in constant currency terms and 30 basis points below our estimates. Revenue growth was affected by a slowdown in the banking, financial services and insurance vertical in the second half of the quarter.
TCS indicated a demand slowdown in key verticals, primarily in discretionary spends, while cost efficiency spends remained robust.
Q4 deal total contract value was strong at $10.0 billion (up 28% QoQ, book-to-bill ratio at 1.4 times), bringing FY23 TCV to $34.1 billion (flat YoY) despite a muted macro environment.
Q4 Ebit margin was flat at 24.5% (versus our estimate of 30 bps QoQ increase), impacted by a pause in few discretionary projects in March 2023, along with higher onsite employee costs, partially compensated by lower sub-contractor expenses.
Management commentary on near-term demand was among its weakest in recent history (excluding initial months of pandemic). Management indicated weakness in the U.S. on account of deferrals in discretionary spending from clients, with the BFS vertical being the most affected.
While we view it as concerning, the impact on our estimate for FY24 revenue growth (7.7% YoY CC, a cut of 40 bps from our previous estimate) is limited, as a near-term slowdown has been widely expected and partially factored in our estimates (our BFSI FY24 revenue growth estimate is 5.0% YoY CC, down from 11.8% YoY in FY23).
Moreover, while FY23 TCV (1.2 times book to bill) was flat YoY, TCS highlighted a faster revenue conversion cycle due to smaller share of mega deals (one in FY23 versus three in FY22) in the mix, which should compensate for the discretionary slowdown.
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