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TCS

Earnings Call Summary - Q1FY25

TCS Q1 FY25 Earnings Call Analysis

1. Summary of Quarterly Results

Revenue Growth:

  • Rupee Terms: Increased by 5.4% year-over-year (YoY).
  • Constant Currency: Grew by 4.4% YoY.
  • Dollar Terms: Rose by 3.9% YoY.
  • Geographical Performance:
    • India: Led growth with a 61.8% increase.
    • Middle East & Africa: Grew by 8.5%.
    • Asia Pacific: Increased by 7.6%.
    • Latin America: Rose by 6.3%.
    • United Kingdom: Achieved a 6.0% growth.
    • Europe: Grew by 0.9%.
    • North America: Returned to sequential growth after declining by 1.1% YoY.

Margins:

  • Operating Margin: Maintained at 24.7%, despite a 170 basis point (bps) headwind from annual wage hikes.
  • Net Margin: Steady at 19.2%.
  • Earnings Per Share (EPS): Increased by 10% YoY.

Operational Metrics:

  • Accounts Receivable DSO: Improved to 70 days in dollar terms, up by 5 days YoY.
  • Net Cash from Operations: $1.34 billion, representing 92.8% of net income.
  • Free Cash Flow: $1.23 billion.
  • Invested Funds: $5.59 billion.
  • Interim Dividend: ₹10 per share recommended by the Board.

Client and Workforce Metrics:

  • Total Contract Value (TCV): $8.3 billion for the quarter.
    • BFSI: $2.7 billion.
    • Consumer Business Group: $1.1 billion.
    • North America: $4.6 billion.
  • Client Base Growth:
    • Added 3 clients in the $100M+ band, total 63.
    • Added 3 clients in the $50M+ band, total 140.
    • Added 4 clients in the $20M+ band, total 300.
    • Added 18 clients in the $10M+ band, total 486.
    • Added 20 clients in the $5M+ band, total 697.
    • Added 42 clients in the $1M+ band, total 1,310.
  • Workforce:
    • Total Employees: 606,998.
    • New Additions: 5,452.
    • Learning Hours: 11 million.
    • Competencies Acquired: 1.2 million.
    • Workforce Diversity: 151 nationalities, with women constituting 35.5%.
  • Retention Rate:
    • Last Twelve Months (LTM) retention in IT services: 12.1%, within the comfort range of 11% to 13%.

Segment Performance:

  • BFSI: Returned to sequential growth; declined by 0.9% YoY.
  • Consumer Business Group: Returned to sequential growth; declined by 0.3% YoY.
  • Manufacturing: Grew by 9.4% YoY.
  • Life Sciences and Healthcare: Grew by 4.0% YoY.
  • Energy Resources and Utilities: Grew by 5.7% YoY.
  • CMI: Faced challenges, declining by 7.4% YoY.
  • Technology and Services: Returned to sequential growth; declined by 3.9% YoY.

2. Management Guidance and Outlook

  • Future Outlook:
    • Management remains confident that FY25 will outperform FY24 overall.
    • Emphasis on broad-based growth across industries and geographies.
    • Focus areas include cost optimization, business transformation, and leveraging technology for competitive advantage.
    • Continued investment in workforce reskilling and ecosystem partnerships.
  • Guidance Approach:
    • TCS does not provide specific revenue or earnings guidance.
    • Management opts for a cautious stance due to prevailing economic uncertainties.
    • Consideration may be given to providing more detailed operating metrics in the future based on feedback.

3. Key Analyst Concerns

Lack of Guidance:

  • Concern: Analysts expressed the need for annual guidance and additional operating metrics to better model and understand growth trends.
  • Management Response: Management acknowledged the request and indicated it would be considered internally.

Generative AI Impact:

  • Concern: Impact of Generative AI on business, specific project contributions, and potential headwinds for IT services spending.
  • Management Response:
    • Generative AI discussions are common in new programs, focusing on productivity and cost efficiencies.
    • No significant headwinds observed from Generative AI adoption.
    • Project-specific impacts vary, with productivity gains ranging from 5% to 25%.

Demand Visibility and Growth Sustainability:

  • Concern: Uncertainty about the sustainability of current growth amidst volatile economic conditions.
  • Management Response:
    • While FY25 is expected to be better than FY24, ongoing economic volatility necessitates a cautious outlook.
    • Clients may continue to re-evaluate and prioritize projects based on ROI.

CMI Sector Challenges:

  • Concern: Continued decline in the CMI segment and uncertainties around future investments.
  • Management Response:
    • CMI faces challenges due to delayed returns from 5G investments.
    • Future investments dependent on interest rate environments and economic improvements.

4. Management Tone Analysis

  • Overall Tone: Cautiously optimistic.
    • Confidence: Demonstrated confidence in FY25 outperforming FY24 based on broad-based growth.
    • Caution: Acknowledged ongoing economic uncertainties and potential volatility in client spending.
    • Stability: Emphasized focus on operational efficiency, workforce development, and leveraging technology to sustain growth.
  • Comparison to Previous Calls:
    • Maintained a consistent cautious approach, similar to past communications.
    • Continued emphasis on strategic growth areas like AI and cost optimization without overcommitting to specific financial targets.

Conclusion

Tata Consultancy Services delivered a solid Q1 FY25 with steady revenue growth and maintained margins despite operational headwinds. Management remains optimistic about the fiscal year's overall performance while exercising caution due to economic uncertainties. Key areas of focus include technology modernization, AI adoption, and workforce development. Analysts seek more detailed guidance to better project future performance, a request TCS is considering. The management's tone underscores a balance between confidence in strategic initiatives and prudence in navigating a volatile market environment.