Investors in information technology (IT) stocks are elated. Sector bellwether Tata Consultancy Services (TCS) Ltd has started FY25 on an upbeat note. In the June quarter (Q1FY25), TCS reported sequential constant currency revenue growth of 2.2%, beating the Street's estimate of 1.5%. The improvement in revenue was partially aided by the BSNL project.
Even so, for IT investors who have been driving in a fog due to the sector's bleak revenue visibility, TCS' Q1FY25 earnings are a glimmer of hope. The stock surged 6% on the National Stock Exchange in Friday's early trade. A positive rub-off was also seen in other IT stocks, with sector index Nifty IT up 3.5%.
The TCS management has retained its stance of a better FY25 versus FY24. This optimism is underpinned by earlier macro green shoots. That said, the commentary on the demand environment was cautious, with the scenario remaining the same as seen in Q4FY24. Clients continue to reprioritize projects towards those with immediate returns on investments. This is still leading to deferment of discretionary projects.
Deal wins moderated sequentially owing to the timing of deal closures and the lack of mega-deal wins. But remained robust at $8.3 billion and within the management’s guided comfort range of $7-9 billion per quarter. But there can be challenges. “Deal wins powering growth for TCS in the past two quarters were won in H1FY24, where TCS reported an average TCV of $10.7 billion. To match TCV of H1FY24, TCS has to win TCV of $13.2 billion, a tough ask, in our view, despite commentary of deal wins shifting to Q2FY25,” said analysts at Kotak Institutional Equities.
On the margin front, the Ebit margin stood at 24.7%, down 130 basis points sequentially. Headwinds such as higher third-party expenses and salary hikes were somewhat offset by higher productivity and lower sub-contracting expenses. Ebit is short for earnings before interest and tax.
TCS intends to hire around 40,000 fresh campus graduates in FY25 (around 11,000 hired in Q1), though the pace and timing would depend on demand recovery and utilization levels, the management said. “Further fall in sub-contractor expenses (from around 4% of revenues) and attrition (around 12.1%) is unlikely, in our view,” said analysts at Nomura Financial Advisory and Securities (India) in a report dated 11 July. The research house does not expect pricing to be a margin lever in FY25.
Meanwhile, this calendar year, the TCS stock has risen by around 9% so far. The stock is trading at FY26 price-to-earnings of 26 times, showed Bloomberg data. Although valuation multiples have cooled off, until solid signs of revenue growth revival appear, it would be premature to get carried away by the performance of just one quarter. So, for now, some brokerages have not changed their FY25 and FY26 earnings estimates.
