Tata Consultancy (NS:TCS) Services: Tata Consultancy Services (TCS) delivered in-line revenue growth and stronger operating performance in Q3. Key positives for TCS included (1) growth visibility from mega deals (Q3/Q4 sequential improvement from BSNL deal and JLR deal) and deal market-share gains vs. Accenture (NYSE:ACN) outsourcing, offsetting the impact of leakage in the renewals, (2) commentary on recovery in Europe geography and BFSI vertical (sequential growth even in Q3 adj. for the impact of large program completion), supported by 16% YoY in BFSI total contract value for 9MFY24, vendor consolidation deals + sequential improvement in the qualified pipeline and strongest book-to-bill in Retail & CPG vertical in over a year, and (3) margin improvement and continued scope for improvement aided by declining attrition (within comfort range), sub-con optimization and higher scope for utilization (13% growth in learning hours). Our TP of INR 4,040 is based on 26x FY26E EPS (5Y/10Y average at 26x and 23x).
Infosys (NS:INFY): Infosys (INFO) delivered in-line performance (above consensus) while underperforming TCS sequentially and for FY24E growth. The cut/narrowed guidance implies only marginal growth at the top-end in Q4 despite the benefit from the Liberty Global (NASDAQ:LBTYA) deal ramp-up and normalization of the McCamish impact. The relative weakness is emanating from (1) a higher mix of discretionary services in INFO’s portfolio with slower activity on digital programs, a steep decline in Top 11-25 accounts and pressure on renewals (sub-USD 1bn large deal renewal TCV as compared to USD 1.5bn quarterly average), (2) extended furlough impact in Q4 & increased competition from captives, and (3) attrition in senior management to competition. Revenue guidance for FY24E was tweaked to 1.5 to 2% CC (1 to 2.5% earlier) and margin guidance was maintained. The improving trajectory beyond FY24 is premised on (1) benefits from project ‘Maximus’ driving margin improvement – utilization, pricing, pyramid, delivery efficiency, (2) new deal wins around cost optimization, SAP cloud, and (3) relative strength in manufacturing and E&U verticals (28% of revenue). Near-term upside potential is capped especially if macro recovery is protracted. Maintain ADD on INFO with TP of 1,515 based on 20x FY26E EPS.
Tata Consultancy Services
Path to Recovery
Tata Consultancy Services (TCS) delivered in-line revenue growth and stronger operating performance in Q3. Key positives for TCS included (1) growth visibility from mega deals (Q3/Q4 sequential improvement from BSNL deal and JLR deal) and deal market-share gains vs. Accenture outsourcing, offsetting the impact of leakage in the renewals, (2) commentary on recovery in Europe geography and BFSI vertical (sequential growth even in Q3 adj. for the impact of large program completion), supported by 16% YoY in BFSI total contract value for 9MFY24, vendor consolidation deals + sequential improvement in the qualified pipeline and strongest book-to-bill in Retail & CPG vertical in over a year, and (3) margin improvement and continued scope for improvement aided by declining attrition (within comfort range), sub-con optimization and higher scope for utilization (13% growth in learning hours). Our TP of INR 4,040 is based on 26x FY26E EPS (5Y/10Y average at 26x and 23x).
Q3FY24 highlights: (1) TCS’ revenue print stood at USD 7,281mn, +1% QoQ CC (1% QoQ CC estimate), which was the strongest sequential performance in the last four quarters perhaps indicating that the peak drawdown in renewals is behind. (2) Deal bookings were lower at USD 8.1bn as compared to USD 11.2bn in Q2 (included USD 1bn TCV each from BSNL/JLR deals) comprising NorthAm TCV at USD 4.2bn, BFSI TCV at USD 2.6bn and Retail & CPG TCV at USD 1.5bn. (3) Vertical commentary was stronger in Manufacturing, Life sciences, and Healthcare as compared to BFSI and Hi-Tech. (4) EBITM at 25% (adj. for non-recurring legal settlement) was up 75bps based on sub-con reduction, better productivity, and realization, which offset the impact of furlough and third-party software and license (linked to BSNL deal).
Outlook: We have factored Q4 growth at 0.8% and FY24/25/26E growth at 4.1%, 6.4%, and 8.3% (implying 2% CQGR in FY25/26E). EBITM factored at 24.5/25.5/25.5% for FY24/25/26E respectively, translating to an EPS CAGR of 10% over FY24-26E.
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