TCS gains 3% on in-line Q3 numbers, deal wins may turn into revenue soon

Shares of TCS gained over 3 percent on January 12 after the IT major reported in-line earnings for the quarter ended December 2023 on the back of revenue and margin beat and a healthy deal pipeline.

The IT services company reported an 8.2 percent on-year growth in net profit at Rs 11,735 crore and a 4 percent rise in revenue at Rs 60,583 crore for the third quarter of  FY24 despite a weak demand environment and seasonal weakness.

TCS’s revenue growth in constant currency (CC) was 1.7 percent YoY. It reported total contract value (TCV) at $8.1 billion, down from $11.2 billion in the previous quarter. However, analysts expect TCS‘ strong deal wins of the last few quarters to gradually convert into revenue in the coming quarters.

At 9:20 am, TCS shares were trading at Rs 3,848.00 on the National Stock Exchange (NSE), up 3 percent from the previous close

Outlook

As India’s largest and oldest IT services firm, TCS is well-positioned to benefit from the growing demand for offshore IT services, said Nuvama Institutional Equities.

“Given its greater experience than peers in implementing large, complex, and mission-critical projects, the company is a serious contender for large deals,” Nuvama said. It has a global presence, deep domain expertise in various industries and offerings in digital transformation services, cloud, cognitive business operations, etc, it added.

“A portfolio of turnkey services offerings, traction in emerging markets, ability to roll up, improving sales and marketing prowess, and willingness to take multiple big bets (different go-to-market models) are among the key drivers that should help TCS sustain its hi-growth trajectory in the long run,” the brokerage said.  It stuck to “buy” call on the stock with a target price of Rs 4,500 a share.

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Solid Foundation for FY25

According to Motilal Oswal analysts, the overall demand environment remains positive (barring furlough impact), with strong deal-signing across the board. The deal ramp-ups and execution have been timely with few exceptions and the revenue conversion remains strong.

“Given its size, order book and exposure to long-duration orders and portfolio, TCS is well-positioned to withstand the weakening macro environment and ride on the anticipated industry growth,” the brokerage said.

Bernstein has an “outperform” rating on TCS with a target of Rs 4,170 a share. Despite moderation in overall deal TCV, TCS maintains a healthy pipeline, it said. The company’s robust execution, margin leadership, and strong cash flow position it well in the face of macroeconomic uncertainties, the brokerage said. TCS’s market share gains, stable order book and improving pipeline create a solid foundation for FY25.

Challenges persist

Jefferies said TCS’ earnings were broadly in line with expectations but let the rating unchanged at “hold” with a target price of Rs 4,000, saying broad-based weakness continues to prevail. In the quarter under review, TCS saw its headcount plunge by 5,680 on a net basis. This is the second consecutive quarter for TCS seeing a headcount decline. According to analysts, the sharp headcount decline suggests that demand recovery is not yet in sight.

The company’s 70 bps margin expansion on-year to 25 percent was the key positive surprise in Q3, according to Jefferies, and the brokerage expects the IT firms to deliver 6.7 percent CAGR in CC revenues and 10 percent earnings per share (EPS) CAGR over FY24-26.

Owing to its steadfast market leadership position and best-in-class execution, TCS has been able to maintain its industry-leading margin and demonstrate superior return ratios, according to Motilal Oswal. The brokerage maintained its positive stance on TCS with a ‘buy’ rating and target price of Rs 4,250 implying 25x FY26E EPS, with a 14 percent upside potential.

Meanwhile, Nomura remained bearish on TCS as it issued a “Reduce” call on TCS with a target of Rs 3,160 per share. While TCS exhibited good execution in Q3FY24, the brokerage noted weak deal wins and a lack of visibility in demand pick-up. TCS continues to face challenges with weak headcount addition, although attrition is moderating, it said, adding that there are limited levers available for substantial margin expansion from the current level without significant growth.

Also Read | TCS Q3 results: Net profit rises 2% to Rs 11,058 crore, revenue tops estimates

In the previous session, TCS shares ended marginally higher at Rs 3,726.70 on the National Stock Exchange (NSE). The stock has risen 11 percent in the last one year, underperforming benchmark Nifty 50 which has risen around 21 percent during this period.

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