Tata Consultancy Services (NS:TCS): Tata Consultancy Services (TCS) delivered in-line revenue growth and operating performance in Q3, albeit with a pick-up in deal wins (best book-to-bill for Q3 & Q4 traditionally being strongest in bookings). Key positives for TCS include (1) strong TCV of USD 10.2bn, driven by large deal wins across various markets and industries, (2) positive commentary on broad basing of discretionary spend beyond the BFSI vertical, (3) management’s outlook of CY25 growth to be better than CY24 (despite the impact of BSNL deal), supported by increase in successful deployment of GenAI engagements, (4) TCS’ full stack capabilities and growth across managed services, operating model transformation, vendor consolidation, legacy modernization, CX transformation, and GenAI-led transformation, and (5) higher fresher addition next year indicative of better visibility. BSNL deal tapering-off in FY26E will impact growth (improve margins), even as discretionary spend recovers. Our TP of INR 4,590 is based on 28x FY27E EPS (5Y average at 27x).
Tata Elxsi (NS:TTEX): Tata Elxsi’s (TELX) performance was weak, impacted by a sharp deceleration in the Transportation vertical. While the Q3 aggregate revenue performance was similar to Q2, the constituents flipped – deceleration in (high growth) Transportation vs. short-term impact of Healthcare weakness earlier. Business challenges in the automotive vertical (particularly Europe) led to the delay in new deal closure and reflected in the decline of tier-1 sub-segment. While TELX’s recent deals in APAC region, higher mix of OEM and partnership with Qualcomm (NASDAQ:QCOM) will improve the growth trajectory, core geography’s outlook can delay the recovery. FY25E will be the third successive year of revenue growth deceleration of TELX and second successive year of profit deceleration. While this trajectory is expected to improve over FY25-27E, its visibility has reduced (as compared to concentrated growth mix in prior period). Maintain REDUCE on TELX with a lowered TP of INR 6,190, based on 35x FY27E EPS.
Tata Consultancy Services
Deal momentum picks up
Tata Consultancy Services (TCS) delivered in-line revenue growth and operating performance in Q3, albeit with a pick-up in deal wins (best book-to-bill for Q3 & Q4 traditionally being strongest in bookings). Key positives for TCS include (1) strong TCV of USD 10.2bn, driven by large deal wins across various markets and industries, (2) positive commentary on broad basing of discretionary spend beyond the BFSI vertical, (3) management’s outlook of CY25 growth to be better than CY24 (despite the impact of BSNL deal), supported by increase in successful deployment of GenAI engagements, (4) TCS’ full stack capabilities and growth across managed services, operating model transformation, vendor consolidation, legacy modernization, CX transformation, and GenAI-led transformation, and (5) higher fresher addition next year indicative of better visibility. BSNL deal tapering-off in FY26E will impact growth (improve margins), even as discretionary spend recovers.
Our TP of INR 4,590 is based on 28x FY27E EPS (5Y average at 27x).
Q3FY25 highlights: (1) TCS’ revenue print stood at USD 7,539mn, flat QoQ CC (in line with 0% QoQ CC estimate); however the YoY trajectory moderated to 4.5% YoY CC. (2) Deal bookings were higher at USD 10.2bn as compared to USD 8.6bn in Q2 comprising NorthAm TCV at USD 5.9bn, BFSI TCV at USD 3.2bn and Retail & CPG TCV at USD 1.3bn. (3) Vertical commentary was weak in Manufacturing (expected to recover beyond Q4) due to macro and industry-specific issues in auto and aerospace. (4) EBITM at 24.5% was up 40bps, driven by operational efficiencies like improvement in productivity, utilization and pyramid optimization, which was partially offset by headwinds of seasonality & furloughs during the quarter. Higher hardware & software costs impacted margins by - 50bps QoQ while sub-con was flat sequentially. (5) APAT at INR 123.80bn was supported by higher other income. The board declared a dividend of INR 77 per share, which includes a special dividend of INR 66 (TCS’ dividend yield >3.5%). (6) Headcount dipped sequentially to 607k but TTM attrition inched up to 13%.
Outlook: We have factored Q4 growth at 2.2% and FY25/26/27E growth at 4.6%, 4.6% and 7.1% (implying 1.3/1.9% CQGR in FY26/27E respectively). EBITM factored at 24.8/25.7/26.0% for FY25/26/27E respectively, translating to an EPS CAGR in FY25-27E, slightly ahead of the FY20-24 period.
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