TCS Q1FY24 Earning Highlights

Summary

Q1FY24 Result Highlights

TCS Q1FY24 Performance

Revenue in US dollars increased by 6.6% year over year and 0.4% sequentially, totaling US$ 7,226 mn. Revenue increased by 6.6% YoY in cc terms and remained unchanged on a QoQ basis (vs. our expectation of 0.6% rise). This falls short of both our and the public's expectations. The management reported that the growth in the UK and Latin America area, which in turn was led by cloud transformation transactions since they are in high demand, together with greater cost optimisation deals, was what drove the performance in the first quarter of FY24.

The business reported TCV of US$ 10.2 billion for the first quarter of FY24, up 24.4% year over year and 2.0% quarter over quarter on a strong 28.2% base. Retail & CPG sector reported US$ 1.2 bn in TCV, while the BFSI vertical reported US$ 3 bn. The TCV for North America was $5.2 billion.

Vertical Wise Performance

Growth was widespread across all significant industry sectors, including BFSI (3.0% YoY in cc), Retail & CPG (5.3% YoY in cc), Life Sciences & Healthcare (10.1% YoY in cc), Manufacturing (9.4% YoY in cc), Technology & Services (4.4% YoY in cc), Regional Market & Others (16.9% YoY in cc), and Communications & Media (0.5% YoY in cc. The management commentary is still optimistic about the key verticals and anticipates robust growth driven by successful transaction closures in its key industries. During the quarter, there was a lot of activity to fill the pipeline and close deals, which provided solid revenue visibility.

Geographic Wise Performance

UK and Latin America led the growth in 1QFY24 up 16.1%/13.5% on YoY cc terms, respectively, led by healthy deal momentum, Continental Europe up 3.4% YoY in cc, MEA up 15.2% YoY in cc, APAC up 4.7% YoY in cc and India up 14.0% YoY in cc.

Services

Services: Clients continue to reprioritize, preferring business critical projects and those with a faster ROI. Cost optimization, vendor consolidation and integrated operations are high on priorities. Enhanced flexibility, resilience, and establishment of a solid foundation continue to drive transformation initiatives. Growth was led by cloud modernization, cyber security, IoT and digital engineering.

There is strong interest across industry verticals to engage with TCS to explore generative AI use cases around productivity improvement, content creation and enriching customer interactions with personalized experiences. TCS is supporting these early initiatives through its co-innovation frameworks.

TCS’ point of view is that the full potential of generative AI is best realized through a holistic enterprise-wide initiative encompassing business, legal, risk & compliance, research and innovation, rather than by implementing multiple point solutions. It has launched an advisory offering to help customers create a holistic vision, strategy, business case and plan for enterprise-wide adoption of Generative AI

Other Highlights

Attrition moved down to 17.8% (down by 230 bps on QoQ basis). Net hiring came in positive at 523

Client metrics remained strong; US$ 100 mn+, up by 1; US$ 50 mn+, up by 13; US$ 20 mn+, up by 24 and US$ 10 mn+, up by 42, YoY basis.

The company has ~148k hyperscaler cloud certifications, the highest among SIs. In 1QFY24, TCS won Microsoft’s 2023 Partner of the Year awards in five categories.

Q1FY24 Conference Call Highlights

Management Comments

• The company reported 13% YoY revenue growth; 6.6% in USD terms; 7.0% in cc terms.
• Salary increase led to 200 bps impact on margins; 6% average salary hike.
• 70 bps savings due to lower sub-contracting; net impact of 130 bps on QoQ margins.
• DSO 65 days, flat QoQ.
• 55% workforce back to office.
• Investments continue to deliver outcomes, 180k high demand competencies; 1.3 mn total.
• LTM attrition to be back to industry benchmark by 2HFY24

Business Highlights

• Management mentioned that the most of the narratives are now behind us as the baking crisis related issues in US and EU is largely resolved.
• Strong deal wins during the quarter.
• The company reported decline in EBITM due to wage hike and low currency tailwinds. Management indicated that margin will be remains at their earlier band of 26-28% in the longer run.
• Strong growth in UK and Latin America. Management is expecting the growth will continue to be strong from these region and other regions is showing some partial recovery.
• Deferment of projects continue this quarter
• Macro uncertainties resulting in greater caution. Clients taking month on month approach, and thus discretionary programmes under pressure. Disrupts normal flow of work.

Growth Factors

Revenue at `59,381 crore | Growth of +12.6% YoY, +7% in CC
UK (+16.1% YoY), Life Sciences and Healthcare (+10.1%) and Manufacturing (+9.4%) lead growth
Net Income at `11,074 crore | Growth of +16.8% YoY
Order Book of $10.2 billion, book to bill ratio of 1.4

Financial Performance

Valuation and Outlook

Results for TCS's 1QFY24 were consistent on the revenue and profitability fronts. The commentary is still cautious and is being backed by good transaction momentum across the board (high TCV wins). Due to the bigger than anticipated margin decline and the region's ongoing weak performance, we forecast flat to marginal performance in the near future. The potential for downside will be limited by positive commentary on the demand environment, revenue conversion over the medium term, and growth in the UK markets. We believe TCS is well-positioned to profit from vendor consolidation in the transformation spending due to its 1) full-service model, 2) strong client base, 3) best-in-class execution, and 4) broad expertise and footprint across technologies. The stock currently trading at 22x FY25E EPS.