Tata Consultancy: Deal Flow Still Strong Despite Project Delays

Wide-moat Tata Consultancy Services TCS reported fourth-quarter results that came in slightly under our expectations. While delays in projects are causing near-term revenue weakness, we’re encouraged by overall deal activity that we believe bodes well for the long run. We think overall deal health is likely not specific to TCS, as we expect peers Infosys and Wipro are experiencing the same. Leaving earnings results with more reassurance while factoring in uncertainty, we are increasing our fair value estimate for TCS to INR 2,960 from INR 2,840. We view TCS as fairly valued, as the company trades near INR 3,210 upon results.

Fourth-quarter revenue of INR 592 billion grew 11% year over year in constant currency. TCS’ largest vertical, banking, financial services and insurance, or BFSI, moderated overall revenue growth, as it grew by 9% year over year in constant currency. In contrast, TCS’ fastest growing vertical, regional markets and others, grew by 15% year over year in constant currency. BFSI, however, was not the only area of weakness—but also North American revenues in general. Nonetheless, we are comforted by TCS’ maintained strong demand. TCS shared that deal flow is not slowing. In fact, the company stressed that in Europe, it is accelerating. That being said, revenue is affected due to delays of projects, especially considering that deal mix is including more cost-optimization deals, which tend to be larger in size and longer in duration—meaning more time for revenue conversion. Overall, fourth-quarter book/bill was a solid 1.4.

Operating margin in the quarter was 25%, marking a year-over-year contraction of 50 basis points, due to increased on-site cost pressure as bigger digital transformation projects require more expensive employees to work on such projects. We have tapered 2024 operating margins from our previous forecasts as we expect similar cost pressures ahead.