Noting commentary on sustained weak macro environment, TCS' growth visibility remains low. Despite healthy deal wins, delays in deal ramp-up keep pushing out growth rates. Margins remain healthy, but operating leverage would see pressure further slowdown.
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Dolat Capital Report
Tata Consultancy Services Ltd.'s Q1 FY26 results marked a sharper than anticipated impact of BSNL as well as sustained macro uncertainty related to international business led to deal delays and slow revenue conversions.
Commentary suggests lack of clarity on peaking of uncertainty in International as well as ramp-up of new BSNL deal in India. Noting this, we lower FY26/FY27E Revenue by 2.9%/3.7%.
Operating profit margin estimates largely unchanged for FY26E and mildly lowered for FY27E. Overall, earnings lowered by 2.2%/4.3%.
TCS posted constant currency revenue decline of 3.4% QoQ, (below our estimate of 1%), due to sharp ramp-down of BSNL biz impacting India biz (-2.8% QoQ in CC), while International, revenue was down 0.5% QoQ in CC due deal deferrals/delays affecting revenue conversions.
Lowered utilization, absence of hardware cost and modest forex gains led to margin uptick of 30bps QoQ, leading to operating profit margin of 24.5% (our estimate: 23.8%).
Commentary on achieving better growth in International biz. over FY26; while delays in add-on BSNL deal to impact India and overall revenues for the company. TCV improving at $9.4 billion ($40bn on trailing twelve months basis down 1% YoY) but delays in ramp-up remain.
Commentary was muted, with uncertainty remaining an overhang on growth. We have lowered our FY26E/FY27E earnings estimates by 2.2%/4.3%.
In view of moderating growth prospects, we revise rating to ‘Reduce' with target price of Rs. 3,600 valued at 24x on FY27E.
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