TCS Q2 Results Review: Record Dealmaking, But Dollar Revenue Shrank

Tata Consultancy Services Ltd. has recorded its second-highest deal wins in a quarter, but its dollar revenue shrank. Why?

“While large deal wins were strong, revenue growth stayed weak due to slow discretionary spend and scope expansion work,” HSBC Securities and Capital Markets (India) Pvt. said in a report after TCS’ second-quarter earnings. “This has been a similar trend in recent quarters. We do not think this will change in Q3…”

Revenue of India’s largest IT services firm rose 0.52% over the previous three months to Rs 59,692 crore in the quarter ended Sept. 30, according to an exchange filing on Wednesday, Oct. 11. That compares with the Rs 60,641-crore consensus estimate of analysts tracked by Bloomberg.

TCS Q2 Results: Key Highlights (QoQ) 

• Revenue up 0.52% at Rs 59,692 crore (Bloomberg estimate: Rs 60,641 crore) 

• EBIT up 5.02% at Rs 14,483 crore (Bloomberg estimate: Rs 14,420 crore) 

• EBIT margin at 24.26% vs 23.2% (Bloomberg estimate: 23.78%) 

• Net profit up 2.42% at Rs 11,342 crore (Bloomberg estimate: Rs 11,372 crore)

In dollar terms, TCS’ top line shrank marginally to $7.21 billion in July–September as against $7.23 billion in April–June. In constant currency terms, the revenue rose 0.1% sequentially.

The bellwether of India’s $250-billion IT services industry clocked a total contract value of $11.2 billion in the September quarter—the third straight quarter of new deal wins in excess of $10 billion. The company has maintained a TCV run rate in excess of $8 billion for the past few years.

“Discretionary spend may pick up gradually from Q4 FY24 onwards... A ramp-up of large deals should provide some support for revenue growth recovery,” HSBC stated in its report.

Shares of the company fell 1.13% to Rs 3,569 apiece, compared with a 0.02% decline in the benchmark Nifty 50.

Here’s other brokerages said about TCS’ Q2 results:

HSBC

• Maintain 'hold' with a target price of Rs 3,625 (earlier Rs 3,640)

• Strong deals win, but Q2 revenue missed estimates due to weak discretionary spending.

• V-shaped recovery in H2 FY24 is unlikely, as benefits from large deals expected in FY25

• Minor growth in 2Q banking; uncertainty about structural recovery trends

• The slowdown in flow business due to macro uncertainties expected to improve in Q4 FY24

• Despite the TCV trend being strong, it only drives half of growth for IT companies 

• TCS valued at unchanged 26 times target PE multiple, aligning with the five-year average

Jefferies

• Maintain 'hold' rating with a price target of Rs 3,690 (earlier Rs 3,450)

• Q2 revenue missed due to broad-based weakness in four out of eight verticals

• Profit beat estimates due to higher-than-expected margins

• Demand recovery in near term is unlikely due to fall in headcount

• TCS looks to reduce subcontracting despite being already low at 7% of sales

• Cut FY24 revenue forecast by 70 bps to 4.3% YoY constant currency, raise FY24-26 margin estimates by 10bps

Motilal Oswal

• Maintain 'equal-weight' rating with price target of Rs 3,590 (earlier Rs 3,730)

• Revenue remained flat QoQ, missing estimates despite improving order book trends

• Slow conversion to revenue despite strong order book of $11.2 billion

• Cut revenue estimate to 3.3%/9% in FY24/25 in constant currency terms

• EBIT margin at 24.3% ahead of 23.6% estimate raises estimates by 26–55 bps for FY24–26.

JPMorgan

• Recommend 'underweight' rating with price target of Rs 2,900

• Q2 revenue missed sharply despite margins beating estimates

• Margins rose 110 bps QoQ to 24.3%, 30 bps/55 bps ahead of JPM/consensus estimates, led by increased productivity, utilisation and lower subcontracting expenses

• Overall deal TCV up 38%/10% YoY/QoQ at $11.2 billion, below expectations of $12 billion due to lower-than-signed BSNL contract

Nomura

• Near-term visibility remains low; maintain 'reduce'.

• CC sequential revenue growth of 0.1%, below the expected 1%

• EBIT margin at 24.3% surpassed the consensus estimate of 23.7%

• UK and MEA saw robust growth, up 10.7% and 15.9% YoY, respectively

• North America and Europe reported weak growth, at 0.1% and 1.3% YoY.

• Growth in energy, resources, and utilities 

• Weak performance in communications and media verticals