Tata Consultancy Services Ltd

Summary

Tata Consultancy Services Ltd: Q3FY23 Earnings Highlights

Q3FY23 Earnings Highlights

• In cc terms, revenue grew by 2.2% QoQ and 13.5% YoY. In USD terms, revenue grew by 3.3% QoQ and 9% YoY to US$ 7.1 bn against our expectations of 7% YoY and 1.5% QoQ growth.
• EBIT margin of 24.5% in 3QFY23 was 50 bps higher QoQ. EBIT grew by 16.7% YoY and 7.6% QoQ. PAT grew by 11% YoY and 4% QoQ to Rs 108 bn.
• Order book was US$ 7.8 bn which remained flat YoY and down QoQ. Book-to-Bill ratio stood at 1.1x. BFSI reported US$ 2.5 bn and Retail reported US$ 1.2 bn deal wins. Although, pipeline remained strong, delay in decision-making, especially in Europe, impacted the deal bookings in 3QFY23.
• IT Services Attrition trending down: LTM Attrition at 21.3%
• Operating Margin at 24.5%; Net Margin at 18.6%

Segment Highlights

Industries Wise Growth: Growth was led by Retail and CPG (18.7%) and Life Sciences & Healthcare verticals (+14.4%). Communications & Media grew +13.5% and Technology & Services grew +13.6%. Manufacturing grew +12.5% while BFSI grew +11.1%.

Geographic Wise Growth: Among major markets, North America and UK led with +15.4% growth; Continental Europe grew +9.7%. In emerging markets, Latin America grew +14.6%, India grew +9.1%, Asia Pacific grew +9.5% and Middle East & Africa grew +8.6%.

Services: Growth in Q3 was led by Cloud, Cyber Security, Consulting Services and Enterprise Application Services.

• Consulting & Services Integration: Demand for Consulting services focused on strategic growth and transformation offerings including next-gen ERP transformation, supply chain and cloud strategy.
• Cloud Platform Services: TCS’ cloud units continued to see very strong growth led by services for cloud migration and modernization, hybrid cloud adoption, managed services and governance.
• Digital Transformation Services: Growth in Q3 was led by offerings around Salesforce, SAP, and niche SaaS platform services in the areas of human capital management, supply chain & CRM, managed security services and enterprise vulnerability management. There was increased SaaS adoption to improve the experience across sales & service channels, improve employee engagement, and derive better business insights. TCS’ services leveraging TCS Crystallus™ are delivering business value through industry innovations across the enterprise. On the cybersecurity front, clients engaged TCS to uplift and automate the invested ‘defense in depth’ security architecture and processes while ensuring agility in tackling adverse events through threat surface management and automation. Clients also engaged TCS to help them with cyber-audits and assessments, threat intelligence, and Digital Identity Management.
• Cognitive Business Operations: Witnessed strong bookings in this quarter led by several large deals reflecting the robust demand for our business services. Our next-gen integrated MFDM™ led operations services leveraging Cognix™ continued to see strong adoption. We are seeing a trend among our customers of vendor consolidation and managed services across functions to enable optimization, coinnovation, faster decisions with intelligent analytics, and better user experience. Growth for the quarter was led by Supply Chain, F&A, and Digital Workplace services.

Other Highlights

Total Dividend per share of 75 per share including 67 as special dividend
Record date 17/01/2023 | Payment date 03/02/2023
• Total Shareholder Payout of `33,297crore Year till Date

Outlook and Valuation

TCS had results throughout the quarter that were in line with expectations. But the company's sales increased 2.2% on a quarter-over-quarter basis and 13% YoY in CC terms. Since the attrition rate and sub-con cost have improved sequentially, the company's margin is expected to continue to grow in the upcoming month, according to management. If we look at a sequential basis, the demand scenario is still robust over the entire geographic area, but there are some delays in the decision-making process. Since the management predicted that FY24 will have balanced growth rather than the stronger growth of the previous two years, the near-term outlook for earnings appears cloudy, but taking into account the robust demand will accelerate growth. The company is trading at 25x multiple on FY24E EPS which is above pre-covid multiple.