Tata Consultancy Services rating – Outperform: Results were largely in line with estimates

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TCS grew by a healthy 3.2% cc q-o-q, (on an already high base of Q3), which was largely in line with CS-e of 3% (consensus 2.7%). TCS closed FY22 with a robust 15.3% cc y-o-y growth. Total contract value (TCV) came in at $11.3 bn in Q4FY22 (large deals of $1.8 bn).

Operating margin was flat q-o-q at 25%, 30 bp below our expectation of 25.3%. FY22 operating margins declined by only 60 bp in spite of the sharp rise in costs this year. Higher retention, hiring and subcontracting costs were offset by currency and operating leverage benefits. Attrition has started flattening. TCS highlighted that they are witnessing pricing improvement in renewals and new contracts. We note that ISG, in its Q1CY22 review, highlighted 4-7% pricing increase with in-demand skills like cybersecurity and engineering commanding as high as 15% increase. In contrast, TCS mentioned that it expects increments to be in the 6-8% range in FY23 (similar to FY22).

We cut FY23e/24e EPS by 3-4% to account for near term lower margins and introduce FY25e EPS of Rs 155. We cut our TP to Rs 4,350 (from Rs 4,600) as we reduce TCS’ 12M forward P/E multiple to 30x (in line with Accenture’s last 3 months average multiple) from 33x earlier and roll forward our valuation to Jun-24 end.

Largely in-line quarter: Growth was broad-based across verticals. BFSI and Retail led the growth, while North America stood out among geographies. TCS closed FY22 with a robust 15.3% cc y-o-y growth. Total contract value (TCV) came in at $11.3 bn in Q4FY22, including large deals of $1.8 bn. Even on excluding the large deals, TCS’ Q4 TCV grew by 25% q-o-q and 3% y-o-y.

Ebit margins in a close range despite sharp rise in costs: Net profit missed estimates by 1.6% in spite of in-line operating performance, due to lower other income. FY22 operating margins declined by only 60 bp in spite of the sharp rise in costs this year. Attrition has started flattening for the company on a month on month basis.

Pricing improvement in renewals and new contracts: TCS highlighted that they are witnessing pricing improvement in renewals and new contracts. We note that ISG, in its Q1CY22 review, highlighted 4-7% pricing increase with in-demand skills like cybersecurity and engineering commanding as high as 15% increase. We believe price increases should help the company going forward. TCS mentioned that it expects increments to be in the 6-8% range in FY23 (similar to FY22).

Maintain OUTPERFORM with a new TP of Rs 4,350: Management highlighted multi-year high growth environment with tech spends being prioritised. However, margins are expected to be volatile in the near term. Accordingly, we cut FY23e/ FY24e EPS by 3-4% and introduce FY25e EPS of Rs 155. We cut our TP to Rs 4,350 (from Rs 4,600) as we reduce TCS’ 12M forward P/E multiple to 30x from 33x earlier and roll forward our valuation to Jun-24 end. We reiterate our positive view on TCS.