Hold Tata Consultancy Services; target of Rs 3708: ICICI Securities

ICICI Securities research report on Tata Consultancy Services

TCS has reported muted growth of 0.1% QoQ in CC terms and a decline of 0.2% QoQ in USD terms in Q2FY24, much weaker than our and street’s growth expectations of 1.2% and 1.1% QoQ USD, respectively. It reported sequential revenue decline (after a gap of three years due to covid), despite a strong orderbook of USD 11.2bn (+10% QoQ and 38% YoY), implying a book-to-bill ratio of 1.6x, because of continued rationalisation of spends in older projects and a cut in discretionary spends. EBIT margin at 24.3%, +110bps QoQ, was ahead of our and street’s estimates of 23.7% and 23.9%, respectively, led by an improvement in utilisation, better productivity and a reduction in sub-con costs. There is continued uncertainty around the timeline of revival in overall tech spending.

Outlook

The company has announced buyback of INR 170bn, at a share price of INR 4,150, which could provide some technical support until the buyback closure date (yet to be announced) (Refer Exhibit 3).