TCS slips nearly 2% on weak management commentary post Q4 results

Shares of Tata Consultancy Services (TCS) dipped nearly 2 per cent to Rs 3,183.15 on the BSE in Thursday's intra-day trade after the company reported a mere 0.6 per cent quarter-on-quarter (QoQ) growth in revenue in constant currency (cc) basis for the quarter ended March 2023 (Q4FY23).

In rupee terms, the revenue grew 16.9 per cent year-on-year (YoY) at Rs 59,162 crore. This is one of the slowest sequential revenue growth in constant currency in over 11 quarters.

TCS' net profit grew 14.8 per cent YoY and 5 per cent QoQ at Rs 11,392 crore during the quarter. Ebit margins remained flat at 24.5 per cent due to some onsite sticky costs, which cancelled out benefits from cost pyramid optimisation, better utilisation, etc.

The company's Q4 performance missed Bloomberg estimates on revenue, but met profit estimation. Bloomberg had reckoned revenue to be at Rs 59,410 crore. Net profit, too, fell a tad short of the estimated Rs 11,533 crore.

Revenue growth was affected by a slowdown in the BFSI vertical in the second half of the quarter. TCS indicated a demand slowdown in key verticals, primarily in discretionary spends, while cost efficiency spends remained robust. Q4 deal TCV was strong at $10 billion (up 28 per cent QoQ, book-to-bill ratio at 1.4x), bringing FY23 TCV to $34.1 billion (flat YoY) despite a muted macro environment.

According to ICICI Securities, the growth challenges are likely to sustain in the near term, especially in the North America market where the demand environment has deteriorated further in BFSI, retail and TTH sectors. Clients have cautioned that spending in these sectors and even some discretionary programs have been paused, which likely to impact growth.

"UK market, meanwhile, is expected to continue the growth momentum due to strong deal wins. CEO appointment for five years may provide some stability. Pricing commentary has been positive in the context that it may not increase in the challenging demand environment but the company ruled out any discounting, which means pricing discipline is likely to be maintained, going forward. Attrition along with cost optimization measures will likely help margin expansion in the near term but it would be more gradual now compared to earlier expectation of acceleration there," the brokerage firm said in a note.

That apart, the management's commentary on near-term demand was among its weakest in recent history (excluding initial months of pandemic). Management indicated weakness in the US on account of deferrals in discretionary spending from clients, with the BFS vertical being the most affected.

"While we view it as concerning, the impact on our estimate for FY24 revenue growth (7.7 per cent YoY CC, a cut of 40bp from our previous estimate) is limited, as a near-term slowdown has been widely expected and partially factored in our estimates (our BFSI FY24 revenue growth estimate is 5.0 per cent YoY CC, down from 11.8 per cent YoY in FY23)," Motilal Oswal Financial Services said in result update.

The increase in interest rates, slow economic growth and elevated geo-political tensions has adversely affected the macro environment and raised concerns over IT spends. Given TCS’s size, order book and exposure to long duration orders and portfolio, it is well positioned to withstand the weakening macro environment and ride on the anticipated industry growth. Owing to its steadfast market leadership position and best-in-class execution, the company has been able to maintain its industry-leading margin and demonstrate superior return ratios, the brokerage firm said.