TCS reported results that were generally in line to marginally weaker, as compared with already-muted, expectations. Given the bar was low and results did not beat expectations, it will not do much to change the prevalent broader negative sentiment surrounding IT stocks and sector. The management commentary, too, did not offer anything to be positive about.

Revenue was in line with consensus estimates (Bloomberg), while operating income was 1.5 per cent below expectations. Operating margin at 23.2 per cent was weaker than expectations of 23.4 per cent. Another important metric — constant currency (CC) revenue growth (year on year) came in at 7 per cent. Excluding the Covid-impacted Q1FY21, the current quarter reported the weakest Q1 CC growth since Q1FY19.

The attrition rate has reduced to 17.8 per cent from 19.7 per cent last year, yet no improvement in operating margins was seen as compared with Q1 of last year, implying other cost pressures. As such, results reflect some revenue as well as cost pressures, although the company typically claws back on margin impact from Q2 every fiscal.  

Reported EPS was 1.3 per cent above expectations, but this is unlikely to be viewed positively given the beat is marginal and also driven by non-operating items.

Revenue growth was weak in the company’s largest markets, with North America (52 per cent of revenues) CC revenue growth at just 4.6 per cent and Continental Europe (15 per cent) growing at a mere 3.4 per cent. The UK (16 per cent) was resilient, delivering a strong 16 per cent growth. This and India/MEA regions (7 per cent) growing at around 15 per cent partially offset weakness in key US markets. Within verticals, BFSI (31 per cent of revenue) grew just 3 per cent.

What lies ahead

Typically, the TCS management is opaque when it comes to outlook and does not give a guidance. So one will have to read between the lines and connect the dots. Based on comments from the management, it is quite clear there are pockets of weakness in the BFSI and telecom verticals. The management is also not sensing any signs that a recovery has started. This reflects caution from clients, and with recession risks still persisting, the risks appear more to the downside for now.

TCS, currently, trades at a trailing PE of 27 times. While this is cheaper than its five-year average of 30 times, the last five-year period reflected a phase of re-rating of IT stocks amidst acceleration in growth and lower interest rates globally. In the current context, TCS trades at a 20 per cent premium to its pre-Covid five-year average valuation of 22.7 times, which is a better reference point in our view as growth is decelerating this time and derating in valuations is warranted. Interest rates are also expected to remain higher for longer, which can compress equity valuations further. At bl.portfolio, we had given a book profit call in TCS in January 2021 and re-iterated our stance in March 2022. The absolute and time-wise correction in the stock since then has flushed out the froth in valuations, but it is yet not in the attractive zone.

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