TCS Q4 Review - Strong Deals, Superior Execution To Support Valuation Premium In Tier-1: HDFC Securities

HDFC Securities Institutional Equities Report

Tata Consultancy Services Ltd. remains our preferred pick in tier-I IT, as highlighted in our recent updates (IT sector – Europe playbook and Tech hiring to recover in CY24).

While TCS’ revenue growth was along expected lines in Q4, it pushed the envelope on deals and operating performance. Market share gains in vendor consolidation/cost optimisation programs and outperformance in margins substantiate superior execution, even as discretionary spending remains challenged.

While we have only marginally increased our earnings estimates, Q4 performance has raised the probability of growth acceleration based on record deal wins, bottoming out of core verticals/geo and scope to further progress on margins.

We expect TCS’ growth to accelerate from 3.4% constant currency in FY24 to 6.3% and 8.2% in FY25E and FY26E with Ebitm at 25.5% and 26.0% respectively, translating into an 11.5% earnings per share compound annual growth rate over FY24-26E.

Maintain Add on TCS with target price of Rs 4,500 based on 28 times FY26E EPS, in line with its five year average price-to-earnings growth.

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