TCS Q4: IT investors would do well to temper their expectations

TCS Q4 and IT investors

Investors in the IT sector were anxious as they moved into the Q4FY23 results season, and to add to their anxieties, Tata Consultancy Services Ltd (TCS), the sector bellwether, failed to reach consensus projections.

On a sequential basis, its revenue in constant currency terms, increased 0.6%, missing analysts’ projections of 0.9% revenue growth. Region-wise, North America showed weaker-than-expected growth.

While growth momentum persisted in the UK region, it weakened throughout Europe. This has generated worries about the sector’s near-term revenue visibility. Analysts at Jefferies India Pvt Ltd observe that the company’s revenue growth was the slowest since Q1FY21.

A slowdown in the major banking financial services and insurance (BFSI) sector in the second half of the quarter, weighed on TCS revenue growth.

TCS’s Q4 Ebit margin remained steady at 24.5%, which means that the business missed its indicated 25% exit Ebit margin target for FY23. Ebit is earnings before interest and tax.

Halt in some discretionary projects coupled with rising onsite personnel costs, played a spoilsport here. The total contract value of $10 billion climbed 28.2% sequentially, however, fell 11.5% year-on-year. This suggests a trailing 12-month book-to-bill ratio of 1.2x – its lowest in three years, says the Jefferies study.

This has led to decreased earnings per share projections for TCS. “We modestly decreased our FY24-25F profitability by ~1-2% driven both by revenues and margins. Our FY24-25F Earnings are ~5-8% lower than consensus,” said analysts at Nomura Financial Advice and Securities (India) Pvt. Ltd.

Investors would do well to take notes from TCS Q4FY23 earnings and keep their expectations low about the sector’s medium-term profits potential, despite the dampened global macro-economic environment.

The stock slid roughly 1.5% on the National Stock Exchange on Thursday reacting to the earnings, which were announced post-market-hours on Wednesday.

In this calendar year so far, shares of TCS have dropped by 2.35%, a tad higher than the Nifty IT index. A sharp jump in the stock is unlikely, at least soon. The stock’sFY24 price-to-earnings multiple of around 25 times, adds to the anxiety.