Tata Consultancy Services Ltd. (tcs.bo): Earnings Review: Subdued but in line quarter; limited revenue visibility with potential margin pressures

Research evidence excerpt

Tata Consultancy Services Ltd. (tcs.bo): Earnings Review: Subdued but in line quarter; limited revenue visibility with potential margin pressures

Goldman Sachs Tata Consultancy Services Ltd. (TCS.BO)

impacting margins.

Change to estimates: Our FY27E/FY28E revenue growth forecasts for TCS are

essentially unchanged, though EBIT and EPS are 2-3% lower due to our expectations of

moderate margin pressures. Our 12m target price moves to Rs2,370 (from Rs2,410); we

remain Buy rated on TCS, which is trading at the lower end of sector multiples, despite

growth expectations are not meaningfully different vs. the rest of our coverage.

Demand environment continues to be subdued: TCS’ 1QFY27 revenue growth of 0.4%

qoq (constant Fx; 0.3% on an organic basis) was in line with GSe but modestly ahead of

the VA consensus. Per TCS, the quarter was impacted by uncertainty amid the Middle

East conflict, resulting in some clients deferring projects. However, TCS sounded

optimistic regarding demand recovery in Q2. Order book growth was broadly flat at 1%

YoY (rolling 4-quarters) with 1.25x book to bill.

No growth in international markets: Excluding India, TCS’ revenue growth in 1Q was

-0.1% qoq. By vertical, growth in 1Q was driven by BFSI and technology, while consumer,

life sciences & healthcare and manufacturing verticals saw weakness. Consumer was the

weakest vertical (-4% qoq), which per TCS was due to a combination of inflationary

pressures and geopolitical uncertainties. Manufacturing was negatively impacted due to

TCS’ relatively high exposure to autos. TCS expects continued growth momentum in BFSI

and technology, and expects healthcare and manufacturing to improve in 2Q.

Margins could remain under pressure: EBIT margin in 1Q was at 24% (-130bps qoq)

and was below GSe at 24.4%.