Tata Consultancy Services announced “unusual” third-quarter results with the company reporting a sluggish performance in what is typically a strong quarter.
Much of the sluggishness was blamed on macroeconomic uncertainty which had led to cautious discretionary spending by clients.
Earlier in the quarter, TCS had warned of soft demand within its banking, financial services, and insurance (BFSI) business, which largely played out. Surprisingly, the company also noted a slowdown in its retail and consumer packaged goods (CPG) business.
Addressing secular growth worries, management sought to quell concerns by indicating an inevitable return to more normal spending patterns, which we agree with. Despite short-term headwinds, on a longer-term basis, we think clients will need to continually invest in their technology (whether that be services, applications, or infrastructure) in order to remain competitive in a globalized world.
One silver lining was the fact that TCS experienced no contract cancellations, instead, the firm only experienced project delays. When normalized spending does return, we believe TCS will remain a go-to vendor for many of the world’s largest enterprises given advantages in scale, branding, expertise, and intellectual property.
We reiterate our Rs 2,725 fair value estimate and narrow economic moat rating. With the firm trading in 4-star territory, we think investors should consider investing in this leading Indian-based vendor.
For the quarter, revenue rose 7.8% year over year to Rs 293 billion (declined 0.1% on a sequential basis). Regardless of the weaker BFSI and retail performance, Life Sciences & Healthcare, Energy & Utilities, and Manufacturing all reported solid sequential growth (up 3%-5%). From a geographic perspective, Continental Europe and Asia-Pacific also performed well, growing 3.7% and 3.5%, respectively. Digital services remained an area of growth with a number of new engagements announced.
We expect TCS to continue its investment in its digital capabilities and forecast an increasing proportion of its revenue to be generated via digital (16.1% during the quarter). The highlight of the quarter was TCS’ operating margin of 26.0%, up 94 basis points sequentially, owing to optimization and execution efforts. We expect margins to remain in the firm’s target band of 26%-28% as the firm focuses on balancing top-line growth with appropriate bottom-line returns.
- Fair Value: Rs 2,725.00
- Uncertainty: Medium
- Economic Moat: Narrow
- Moat Trend: Stable
- Stewardship: Exemplary
