TCS Q3: Weak deal wins, negative headcount signal slowdown, say analysts

TCS Q3 results: QoQ decline of 2,200 employees in the total headcount and de-growth of 3.7 per cent in deal bookings at $7.8 billion are indicators that point towards a slowdown, analysts say

Tata Group-major Tata Consultancy Services (TCS) beat revenue expectations in the October-December quarter (Q3) but missed the mark on profit estimates.

It reported a 19 per cent year-on-year (YoY) revenue growth to Rs 58,229 crore while net profit rose 11 per cent YoY to Rs 10,846 crore.

A Business Standard poll had pegged the revenue at an average of Rs 57,446 crore and profit at Rs 11,046 crore.

As of 11 am, TCS scrip was down 2 per cent on the bourses as the management’s positive demand commentary failed to cheer investors.

Moreover, a quarterly decline of around 2,200 employees in the total headcount and de-growth of 3.7 per cent in deal bookings to $7.8 billion are indicators that point towards a slowdown, analysts said.  

Barring these, the overall performance was resilient in the face of global headwinds as the earnings before interest and tax (EBIT) margin improved 50 basis points to 24.5 per cent on currency tailwinds and improved utilisation. The company expects to exit 2022-2023 (FY23) with a 25 per cent margin.

Here’a snapshot of what brokerages make of TCS Q3 results:

Jefferies | Maintain Hold | Target Price (TP): Rs 3,500

TCS' book-to-bill ratio at 1.1x was its lowest in 3 years, while headcount reduction was the fourth time in over a decade. Falling employee headcount and book-to-bill ratio point to sharp growth moderation in FY24. We expect TCS to deliver a constant currency (CC) revenue CAGR of 7.5 per cent over FY23-25, much slower than the 14 per cent YoY expected in FY23. While the company is better placed in a recessionary environment, its rich valuations will likely weigh on stock performance.

Motilal Oswal | Maintain Buy |TP : Rs 3,810

We continue to see growth constraints over the next two quarters, although TCS should be relatively insulated on account of its strong deal backlog (last 12-month total contract value at $35.4 billion). While we expect demand to normalise from Q2FY24, reduced visibility remains a key risk to FY24 growth. Given TCS’ order book and exposure to long-duration orders, it is well-positioned to withstand the weakening macro environment. 

Kotak Instituitonal Equities | Maintain Add | TP: Rs 3,500

Deal wins were weak with a slowdown in growth, transformation deals, and delayed decision-making in Continental Europe. We raise our earnings per share (EPS) estimates by 0-1 per cent factoring in revised cross-currency rate. Our assumption of moderation in growth in FY24 to 8.1 per cent, followed by an uptick in FY25, remains unchanged. 

Nirmal Bang | Maintain Sell | TP: Rs 2,635

Commentary on demand in the US seemed unusually robust, while TCS seems to be gaining market share in the UK. Europe was indicated to be a weak spot. Delay in decision-making and deal conversion is leading to what we think is a clogging of the pipeline. Commentary seems to point to a high single-digit CC revenue growth in FY24, which we estimate to be low-to-mid single-digit on expectations of a shallow recession in the US in 2023.

PhillipCapital | Maintain Buy | TP: Rs 4,000

We have downgraded FY23/24 estimates by 2 per cent mainly on account of lower other income. The stock is now valued at 27x FY25 EPS. We expect TCS to continue to command a valuation premium to its large-cap peers given its superior return profile and market leadership position.