September quarter revenue growth for TCS in constant currency (CC) terms was at just 2.8 per cent. Same time last year, it was at 15.5 per cent. This reflects a stark deceleration or a near halt of the post-Covid growth that had earlier buoyed sentiment around the sector.
However, these results were not unexpected. The sector has been witnessing a slowdown and TCS September Q results are a reflection of what industry leader Accenture’s results had already indicated a few weeks ago. The economic outlook in developed markets remains uncertain and clients were cautious in their spending last quarter, and this caution will continue going forward as well. When will it change? The management does not have clarity yet. Another factor that corroborates cautious outlook is the decline in headcount by 6,333 to 608,985. Typically, if managements were positive that a turnaround was around the corner, they would ideally be adding to headcount
Slowdown during the quarter was seen in both North America (cc Y-o-Y growth of zero) as well as Continental Europe (CC growth of 1.3 per cent). The UK was the lone exception, delivering growth of 10.7 per cent. Amongst industry verticals, BFSI, which accounts for 33 per cent of CC revenue, declined marginally Y-o-Y.
Amidst weaker revenue trends, the company delivered on its cost management. Although revenue missed consensus estimates by 1 per cent, operating profit and EPS were inline.
The ₹17,000-crore buyback (buyback price of ₹4,150 per share) announced by TCS might appear big as an absolute number, but is small as against its market cap of ₹1.32-lakh crore. With buyback size at a low 1.28 per cent of market cap, investors must note that this will not add meaningful value to the continuing shareholders (investors who do not tender shares in the buyback). Buybacks add value to continuing shareholders when large buybacks are done and that too when share prices are undervalued. Trading at 26.7 times one-year forward PE as against five-year average of 26.2 times, TCS shares do not appear undervalued, especially when considering the slowing growth and weaker macro environment.
The TCS buyback done in March 2022 is a good example to consider here. The buyback was done at a price of ₹4,500. A little over 18 months after the buyback, the shares are trading 20 per cent lower from the buyback price, at around ₹3,600 now.
During the March 2022 buyback, in our bl.portfolio article dated March 15, we had recommended to investors to book profits in TCS when it was trading at around ₹3,600. The shares are flat since. We recommend long-term investors to wait and watch for now, given the cautious macro environment in developed markets.