No fireworks from TCS Q2 nos, headcount dip keeps outlook bleak: Analysts

TCS Q2 results: There is limited visibility on demand recovery for the second half of FY24; Rs 17,000 crore buyback quantum is also below Street expectations, said analysts

The second quarter earnings (Q2FY24) of IT bellwether Tata Consultancy Services (TCS) reflected the sluggishness in global demand for IT services in line with the trend of the last few quarters. 

At the bourses, the stock slipped up to 1.6 per cent intra-day on Thursday, weighing on the entire IT pack. 

TCS management noted global worries weighing on client spending, which is leading to some deferments and pauses in ongoing projects. 

This is causing revenue leakage and thus muted growth despite strong order wins. As demand recovery is not in sight yet, visibility for the second half of FY24 also remains low, analysts said. 

While the Ebit margin at 24.3 per cent was a positive surprise, the headcount reduction of 6,333 employees was the highest in over two decades, which keeps the outlook bleak, they add. 

Also Read: TCS dips 1% as Q2 result misses estimates; announces Rs 17,000 cr buyback
 

Here’s what brokerages say on TCS Q2 results: 

Jefferies | Maintain Hold | Target Price (TP): Rs 3,690

TCS Q2 results do not inspire confidence on demand recovery in the near term given the broad-based revenue weakness and a sharp headcount decline with muted hiring outlook. 

Growth in the BFSI vertical remained muted and North America decline of 0.7 per cent quarter-on-quarter (QoQ) in constant currency (cc) for the third quarter affirms persistent weakness.

We cut our FY24 revenue growth forecast by 70 bps to 4.3 per cent in cc terms to factor in Q2 miss but keep our FY25/26 estimate unchanged at 7.5-8 per cent. The stock’s premium valuation limits upside. 

Nomura | Maintain Reduce | TP: Rs 3,030

The order book is holding up as clients prioritise projects with upfront cost savings. We lower FY24-25 dollar revenue growth forecast to 4.1-5.8 per cent from 4.5-6 per cent. 

TCS’ Ebit margin is unlikely to touch 25 per cent in FY24 as weak growth and limited scope to lower subcontracting expenses, already around pre-Covid 19 level, will limit margin improvement. 

Also Read: Sula Vineyards' net revenue up 14% to Rs 116.2 crore in September quarter

Goldman Sachs | Maintain Buy | TP: Rs 4,020

The headcount decline suggests weak near-term revenue outlook. We lower our revenue estimate by up to 1 per cent and see FY24 growth of 3.8 per cent (in cc terms versus 5 per cent earlier and 2.8 per cent pegged for Infosys). 

HSBC | Maintain Hold | TP: Rs 3,625

The second half of FY24 is unlikely to see a V-shaped recovery. The bulk of the ramp-up benefit of large deals will only be visible in FY25. We do not see much room for upside. 

Morgan Stanley | Maintain Equal Weight | TP: Rs 3,590

Q2 showed no respite from macro headwinds. Good execution on the order book is not translating into revenue optimism. 

Nirmal Bang | Maintain Sell | TP: Rs 2,930

The buyback amount seems to be disappointing as it fell short of the Rs 20,000-22,000 crore Street expectation. Deal TCV at $11.2 billion was much better than expected and was the second highest in its history, but we see a ‘slower for longer’ demand environment persisting.  

Also Read: TCS Q2 FY24 misses estimates, hints toward slow growth prospects for FY24

Citi | Maintain Sell | TP: Rs 3,170

The last three quarters have been largely flattish on a QoQ basis for TCS. We lower the cc revenue growth estimate to 3.5 per cent for FY24.