TCS Q3 FY23 results- Its revenues beat estimates, but profits missed due to forex losses, said Jefferies.
The third quarter of the current fiscal year (Q3 FY23) results season was officially launched on Monday by Tata Consultancy Services Ltd. (TCS), the largest IT business in India. TCS reported a lower-than-expected profit of 10,846 crore. Refinitiv data shows that analysts predicted a profit of $11.046 billion on average. TCS shares closed more than 3% higher at 3,310 per share on the BSE ahead of its Q3 results.
According to TCS, revenue increased 13.5% year over year during the quarter in constant currency terms.
Rajesh Gopinathan, chief executive officer and managing director, stated, “We are thrilled with our excellent performance in a seasonally poor quarter, driven by cloud services, market share gains through vendor consolidation, and ongoing momentum in North America and UK.
TCS closed transactions totaling $7.5 billion in the quarter, which was a little less than it was in the two quarters before. The firm secured $8 billion in deals in the first two quarters of the current fiscal year.
Gopinathan stated that “looking forward and beyond the current uncertainty, our longer-term growth outlook remains healthy.” TCS experienced an improvement in operational performance for the second consecutive quarter. EBIT, used to determine the operating margin, increased 50 basis points over the previous period to 24.5%.
According to Samir Seksaria, chief financial officer, “increased productivity, currency support, and easing supply-side issues helped enhance our operating margin in Q3.” In addition to continuing to invest in developing fresh capabilities to support our growth and market share gains, this provides us greater confidence in our ability to direct our profitability towards our preferred range, the executive continued.
Gains in market share and demand for cloud services contributed to the quarter’s growth, which was broadly based in terms of geography and industry verticals. The business did not, however, measure the cloud momentum.
Although TCS doesn’t offer advice, the management claimed to be confident about the demand environment. It added that technological expenditures are unaltered.
Demand this quarter has been influenced by how various markets have acted. Demand in North America is still strong. According to Rajesh Gopinathan, CEO and MD of TCS, “The UK is a difficult operating environment, and Europe is the sole market where decision-making is being impacted by the present geopolitical problems.
Going beyond the current concerns, Gopinathan said: “Our longer-term growth prognosis remains healthy.”
The third quarter performance of TCS was significantly impacted by the ongoing global unrest. First, although it was in the middle of the company’s $7-9 billion estimate, total contract value (TCV) came in at $7.8 billion. Over the previous three to four quarters, TCS was able to keep its TCV above $8 billion. The book-to-bill ratio decreased from 1:2 in the previous quarter to 1:1 this quarter.
Although the management remained vague regarding the budget for FY24, it reaffirmed that the deal pipeline has not yet been affected. “ The general demand situation has not considerably changed.
This quarter, furloughs did have an impact. However, nothing has emerged that warrants concern thus far, according to TCS executive director and COO N Ganapathy Subramaniam.
However, opinions among analysts over how to evaluate the provided numbers varied. The management commentary on the demand environment “seems murky for short to medium term, due to the uncertain global economy,” according to Sanjeev Hota, head of research at Sharekhan by BNP Paribas. The forecast for FY24 now appears dubious due to numerous global obstacles, but the recovery could be slow in the upcoming quarters. The Indian IT sector’s structural development story is still intact, and TCS, as the industry leader, will become stronger. Despite short-term volatility, we continue to be bullish on TCS in the long run.
TCS earnings continue to grow despite the historically bad quarter. Deal wins had a rather lacklustre TCV of $7.8 billion, a 2.6% YoY rise, primarily because of subpar activity outside of the US and the UK. According to a first cut note from Elara Capital, “We will wait for management comments on whether this deterioration was broad-based or skewed beyond the US.
The business generated a 24.5 percent operating margin on the margin front. Forex had a 70 basis point positive influence on the margin, and execution effectiveness contributed 30 basis points. However, these were outweighed by increased third-party expenses and the effects of things returning to normal.
TCS’s CFO, Samir Seksaria, expressed confidence that the business would end FY23 with a margin of 25%. Additionally, he noted that the supply-side limitations have relaxed and that the high expectations for pay have decreased.
TCS Q3 FY23 results fail to lift share prices. Here’s what brokerages say-
Despite surprise on the revenue front, Tata Consultancy Services NSE -1.93% or TCS’s December quarter profits fell short of investors’ expectations. In the early session on Tuesday, shares of the major IT firm were trading 2.5% lower at Rs 3,237.05.
Analyst expectations were not met by TCS’s Q3 revenue growth of 19.1% YoY at Rs 58,229 crore. Although TCS NSE -1.93% had healthy growth during the quarter, according to global brokerage company Jefferies, declining headcount and a book-to-bill ratio suggest that growth will be sharply moderated in FY24.
Due to the weaker rupee, the company’s EBIT margin increased by 50 basis points. With a slowdown in growth and transformation projects and delayed decision-making in Continental Europe, deal wins were modest at $7.8 bn (+2.6% YoY).
The performance of the stock, which has already dropped by almost 17% over the past year, was hampered by TCS’s high valuations.
Here’s what brokerages said after TCS Q3 results:
1. JP Morgan: Underweight | Target price Rs 3,000
Following the December quarter results, JPMorgan maintained an underweight rating on TCS with a target price of Rs 3000.
The Q3 print roughly matched expectations. The immediate view is still cautious. Deal wins are still meagre, and the book-to-bill ratio is falling, which might be problematic.
2. Jefferies: Hold | Target price: Rs 3,500
“TCS’s 3QFY23 revenues above expectations, but profitability, up 11% YoY but missing due to FX losses. Although TCS had good growth in the third quarter, declining workforce and a book-to-bill ratio suggest that growth may sharply slow in FY24. We make a small adjustment to our projections and anticipate TCS to achieve 11% EPS Cagr over FY23–25. Although TCS is better positioned in a recession, its high valuations will probably have a negative impact on stock performance. The high valuations of TCS can restrict gains. Maintain Hold with a 3,500 target price.
3. Morgan Stanley: Equal-Weight | Target price: Rs 3350
After the Q3 results, Morgan Stanley kept TCS with an equal weight rating and a target price of Rs 3350.
TCS reported stronger revenue than expected, but a poor book-to-bill ratio (negative). The note stated that resilient performance and fair commentary confirm optimism for FY24 growth.
4. Nomura: Reduce| Target Rs 2850
After the Q3 earnings, Nomura maintained a cut rating on TCS with a target price of Rs 2850.
Despite a little sales overshoot in Q3, the margin fell short. The report noted that although the order book holding has increased, the near-term visibility has decreased.
5. Kotak Institutional Equities: ADD | Target price: Rs 3,500
Thanks to its complete service business model and capacity to meet clients’ simultaneous demands for cost containment and innovation, TCS is well-positioned in a difficult market. Incorporating the new cross-currency rate, we increase our EPS projections.
6. Antique Stock Broking
“Despite the fact that TCS continues to be among the best managed Indian IT service providers thanks to its capacity to collaborate with significant clients on significant transformation programmes, we lower the IT stock from BUY to HOLD due to the lack of upside. As a result of somewhat lowering our CC growth prediction and margin assumptions, as well as the possibility of a negative impact from macroeconomic concerns in the US, we have reduced our target price from 3,700 to 3,600.
TCS Q3 FY23 Results: ADRs of Infosys, Wipro rise
As a result of peer Tata Consultancy Services NSE -1.81% Limited (TCS NSE -1.81%) reporting optimistic results for the three months ended in December, the American Depository Receipts (ADRs) of Infosys NSE -1.46% and Wipro NSE -0.57% increased on the New York Stock Exchange on Monday.
ADRs for Wipro were up 2.2% at $4.8 while for Infosys they were up 1.3% at $18.05.
TCS reported a robust 5.3% sequential increase and a 19% YoY gain in consolidated revenue to Rs 58,229 crore for the third quarter of the current financial year, overcoming the negative seasonality impact. This was more than the Rs. 56,893 crore that was anticipated.
The North American and UK markets, which together account for two-thirds of TCS’s total sales and three-fourths of its earnings, both had significant 15% rise in revenue, according to the software giant.
Rajesh Gopinathan, chief executive officer and managing director, stated, “We are thrilled with our excellent performance in a seasonally poor quarter, driven by cloud services, market share gains through vendor consolidation, and ongoing momentum in North America and UK.
EBIT, used to determine the operating margin, increased 50 basis points over the previous period to 24.5%.
TCS’s overall analysis did not raise any red flags, despite the company’s statement that it will take a few months to have a good picture of the customer budgets.
Over concerns regarding the difficulties a prospective slowdown in North America and Europe could pose, TCS stated that while caution rules in these areas, there hasn’t been a significant slowdown in decision-making.
The picture for FY24 now appears uncertain due to numerous global obstacles, but recovery could be slow in the upcoming quarters. the Sharekhan by BNP Paribas NSE -0.74% head of research, Sanjeev Hota, said
Despite the short-term volatility, the brokerage maintains a positive long-term outlook for TCS.
TCS shares fall nearly 3% after earnings announcement-
After the company’s December quarter earnings failed to excite investors, TCS shares fell roughly 3% in early trade on Tuesday.
On the BSE, the stock decreased 2.67 percent to Rs 3,231 per share. It decreased 2.70 percent to Rs 3,230.10 per unit on the NSE.
It was the Sensex and Nifty component that lagged the most. The 30-share BSE Sensex was down 437 points, or 0.72 percent, in early trade, at 60,310.31.
“TCS reported a subdued quarter in which the company’s profitability did not increase even while operating revenue increased. As the macroeconomic environment changes will bring clarity across economies, the final quarter of the fiscal year remains a crucial time to keep an eye on things “said Samco Securities analyst Urmi Shah. TCS, the largest IT services provider in India, reported an 11% increase in net profit for the December quarter to Rs 10,846 crore. Profit margins were constrained, but TCS sounded upbeat about the transaction pipeline.
Although its overall revenue increased 19.1% to Rs 58,229 crore for the reporting quarter, a 0.5% decline in the operating profit margin to 24.5% restrained the development of overall profits. According to a report by Emkay Global Financial Services, “TCS delivered better-than-anticipated expected revenue growth in Q3, while margins came a touch below our expectations.”
TCS Q3 margin
Operating Margin for the three months ending between October and December 2022 was 24.5%, down 0.5% year over year, but up from 24% in the three months ending in September 2022.
18.6% Net Margin
Declared interim and special dividend
The third interim dividend from TCS, which includes a special dividend of 67 per share, has been announced by the company’s board.
TCS revenue
The IT giant reported sales of 58,229 crore, up 19% year over year (YoY) and +13.5% YoY in constant currency (cc)
Dollar revenue was $7,075 million, up from $6,877 million from the previous quarter (QoQ)
TCS Q3 results released.
Comparing the third quarter to the same period last year, TCS’ net profit increased by about 11% to Rs.10,846 crore.
The earnings increased by 4% over the previous quarter’s Rs10,431 crore (QoQ)
TCS stock performance
The IT stock had a 52-week high of $4,045.50 per share on January 18, 2022, and a 52-week low of $2,926 on September 26, 2022. In a year, TCS shares have decreased by around 14%.
IT sector overview
The third quarter of FY23 is likely to see only modest growth in the Indian IT services sector, mostly due to the quarter’s seasonal weakness and a slowdown in growth momentum brought on by uncertainty in the US and UK.
