Robust demand outlook may offset margin pressure for TCS: Analysts

Most analysts have broadly maintained their 'buy' rating on the stock as they believe the company's demand outlook for FY23 remains robust despite macro-headwinds.

The country's largest software exporter Tata Consultancy Services (TCS) delivered an overall strong performance in the March quarter (Q4FY22) amid broad based growth in geographies and verticals.

The results were largely in-line with market expectations as evident from its stock price that failed to see any significant move and eked out tepid gains in a weak market on Tuesday. The company reported a healthy double-digit yearly revenue growth of 15.8 per cent at Rs 50,591 crore, and its net profit rose 7 per cent to Rs 9,926 crore.

A major highlight of the company's Q4 performance was the highest ever order book of $11.3 billion, including two $1 billion mega-deals, reflecting a strong demand environment.

The company reported flat operating margins of 25.3 per cent for FY22 and 25 per cent for the quarter under review. This, analysts say, is positive for the company that continues to face significant supply pressures.

"Steady margins, despite strong headcount additions and a rise in subcontracting costs, surprised positively. The margin and profit beat stemmed mainly from higher than expected revenues," Jefferies said.

The brokerage has raised its revenue estimates by 1-2 per cent to factor the profit beat and higher deal bookings and expect the IT major to deliver 12 per cent revenue CAGR in CC terms over FY22-24. It has maintained its 'hold' rating, and raised price target to Rs 3,925 apiece from Rs 3,870.

Overall, analysts have broadly maintained their 'buy' and 'hold' ratings on the stock as they believe the company's demand outlook for FY23 remains robust despite macro-headwinds. This, they say, can help offset margin pressures that will continue in the near-term.

"Margin headwinds will stay in FY23 for the industry, although TCS is much better-positioned to navigate the challenges. The supply side is still challenged, where it has excelled compared to peers, and the firm is better-positioned to defend margins from multiple headwinds of wage revision and increase in travel costs through pyramid rebalancing, higher utilisation and realised prices," Kotak Institutional Equities said in a note.

Attrition woes

The company posted an all-time high attrition rate of 17.4 per cent from 15.3 per cent in the preceding quarter, and the management has indicated that the reported attrition number may rise further in the subsequent quarters. However, it added that attrition is plateauing on a quarterly basis.

"Attrition has flattened out on a sequential basis but will continue to remain high for 2-3 quarters before declining to more manageable levels. We expect meaningful reduction in attrition in the second half of FY23 as the supply gap is filled through heavy fresher addition by the industry," analysts at Kotak Institutional Equities added.

Besides, Motilal Oswal Financial Services believes the company's strong demand outlook will likely compensate for the margin headwind as record headcount addition of 35,000 in the recent quarter has added to demand visibility.

The brokerage expects the company's margins to remain under pressure and below their long-term guided range of 26-28 per cent, but sees current supply-side challenges to normalise over the next two quarters.

Moreover, it says that TCS should start seeing some benefit in overall cost in FY23 from its fresher intake of 100,000 in FY22. The brokerage has marginally raised its FY23 and FY24 EPS estimates by 1 and 2 per cent, respectively, and sees a 13.4 per cent and 16.5 per cent EPS revenue CAGR in dollar and rupee, respectively, over FY22-24.