The December quarter results of TCS come weeks after the negative pre-announcement of HCL Tech.
In the back drop of early indications of clients getting a little more cautious in their spending, all eyes were on TCS to provide more clarity on what is happening. The net result — it offers something for both the bulls and the bears, delaying the judgment on who is winning to a different day.
Glass half full
The results, although a little mixed, was slightly ahead of expectations at an overall level. Reported revenue for the quarter was 1.5 per cent ahead of consensus (Bloomberg estimates), and y-o-y constant currency (CC) growth was quite good at 13.5 per cent.
Operating margin at 24.5 per cent, while down by 50 bps y-o-y, was inline with consensus. EPS was 2 per cent below consensus. Overall, given the slowdown fears, the revenue beat and inline margins, outweigh the EPS miss.
Growth continues to remain broad based albeit slightly tempered in terms of geographic performance. Company reported double-digit CC growth (y-o-y) across all its business verticals.
In terms of geographic growth, North America was strong with growth of 15.4 per cent and continental Europe came in at 9.7 per cent (possibly reflecting some weakness in the geography).
Finally, one more feather in the bull’s cap was the marginal decline in annualised attrition as compared to September quarter at 21.3 per cent (bodes well for margins going ahead).
The glass is half empty
Despite the positives mentioned above, sounds of caution are firming up. To begin with, TCS CEO noted that there are real big issues in Europe and this is impacting client’s decision making. Continental Europe and UK account for about 30 per cent of TCS’ revenues (roughly 15 per cent each).
Clients are showing signs of caution and how this will impact revenue in CY23/FY24 is a wait and watch for now. Further, the company’s book to bill which was at 1.2 at the end of September quarter has come down to 1.1 at the end of December quarter.
Another key thing to note is that after more than a year of fight for talent/human resources amongst IT companies, TCS actually saw a decline in employees of a little over 2,000 employees, which could reflect management getting cautious on growth. Thus, there are enough reasons to remain alert to risks of slowdown and company’s growth taking a hit due to that.
Why bears retain the edge
With something in results for both the bulls and the bears, what may give the bears the edge is that the TCS is stock is not priced for the potential slowdown.
Trading at a one year forward PE of 26 times, marginally above its 5 year average, the stock does not offer any margin of safety in case recession hits the developed markets.
At 26 times PE, TCS earnings yield at 3.8 per cent (earnings growth estimated at 12 per cent), is unattractive against risk-free government bonds yielding above 7 per cent. Investors can continue to avoid the stock for now.
