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TCS

Earnings Call Summary - Q3FY25

TCS Q3 FY'25 Earnings Call Analysis

1. Summary of Quarterly Results

Key Financial Metrics

  • Revenue Growth:
    • Year-over-Year (YoY): Increased by 4.5% in constant currency.
    • Quarter-over-Quarter (QoQ): Revenue stood at ₹63,973 crores, reflecting a YoY growth of 5.6%.
    • In USD: $7,539 million, showing a YoY growth of 3.6%.
  • Margins:
    • Operating Margin: 24.5%, a sequential improvement of 40 basis points.
    • Net Margin: 19.4%.
  • Earnings:
    • Earnings Per Share (EPS): Grew by 6.4% YoY.
  • Cash Flow:
    • Net Cash from Operations: $1.54 billion (105.3% of net income).
    • Free Cash Flow: $1.45 billion.
    • Invested Funds: $7.28 billion.
  • Dividend:
    • Total Dividend: ₹76 per share, comprising an interim dividend of ₹10 and a special dividend of ₹66.

Total Contract Value (TCV)

  • Overall TCV: $10.2 billion.
    • North America: $5.9 billion.
    • BFSI: $3.2 billion.
    • Consumer: $1.3 billion.
  • Growth in TCV: Achieved double-digit YoY growth without any mega deal wins.

Segment Performance

  • BFSI: Grew by 0.9%.
  • Consumer Business Group: Increased by 1.1%.
  • Life Sciences Healthcare: Declined by 4.3%.
  • Manufacturing: Grew by 0.4%.
  • Technology & Services: Declined by 0.4%.
  • Communication and Media: Decreased by 10.6%.
  • Energy Resources and Utilities: Grew by 3.4%.
  • Regional Markets: Increased by 40.9%.

Geographical Performance

  • UK: Grew by 4.1%.
  • North America: Declined by 2.3%.
  • Europe: Decreased by 1.5%.
  • India: Led growth with a 70.2% increase.
  • Middle East: Grew by 15%.
  • Latin America: Increased by 7%.
  • Asia Pacific: Grew by 5.8%.

Client Metrics

  • Client Base: Over 1,300 clients contributing $1 million+ annualized revenue.
  • New Clients: Added three new clients in the 100 million+ band, bringing the total to 64.

2. Management Guidance and Outlook

Future Expectations

  • Client IT Budgets: Expected to remain flat with a positive bias in CY'25.
  • Discretionary Spend: Early signs of revival bolster confidence for CY’25 and FY’26.
  • Margin Aspirations: Aiming to achieve an operating margin between 26% and 28% by Q4.
  • BSNL Contract:
    • Tapering Off: Expected to begin in Q4 or Q1 FY'26.
    • Revenue Impact: Management is confident in managing the tapering effect through new deal wins domestically and internationally.
  • Growth Drivers:
    • Technology Modernization, AI, GenAI, and Cloud Services: Continued strong demand.
    • Industry Focus: Positive outlook on Manufacturing, Life Sciences & Healthcare, and other core verticals once macroeconomic uncertainties stabilize.

Capital Allocation

  • Dividend Policy: Continued commitment to returning substantial free cash flow to shareholders, as evidenced by the ₹76 per share dividend.

3. Key Analyst Concerns

Main Concerns Raised

  1. Revenue Growth vs. Deal Wins:

    • Concern: Slower revenue growth in FY'25 despite strong deal wins in FY’24.
    • Management Response: Some projects were deferred based on ROI expectations. Confident in strong TCV to drive future growth.

  2. Headcount Decline:

    • Concern: Declining headcount despite a positive outlook, raising questions about demand.
    • Management Response: Headcount reduction attributed to Q3 seasonality and optimization efforts, not a reflection of demand.

  3. BSNL Contract Impact:

    • Concern: Tapering of the BSNL contract could lead to significant revenue reduction.
    • Management Response: BSNL tapering to begin in Q4 or Q1 FY'26. Management is confident in mitigating the impact through new opportunities and ongoing deal wins.

  4. Margin Aspirations:

    • Concern: Whether the aspiration to reach a 26% operating margin by Q4 is realistic.
    • Management Response: Achieved a 40 basis point improvement in Q3 and aims to continue margin enhancements in Q4.

  5. Stability of Discretionary Spend:

    • Concern: Macroeconomic uncertainties affecting the revival of discretionary spend.
    • Management Response: Based on current customer discussions and pipeline, early signs of discretionary spend revival are encouraging, though acknowledge it is subject to macro conditions.

Management's Addressal

  • Provided clarity on the reasons behind revenue and headcount changes.
  • Emphasized strong TCV and new deal wins as safeguards against potential revenue declines from BSNL tapering.
  • Highlighted margin improvements and ongoing efforts to enhance operational efficiency.

4. Management Tone Analysis

Overall Tone

  • Confident and Cautiously Optimistic:
    • Management expressed confidence in strong TCV and future growth prospects.
    • Acknowledged existing challenges such as BSNL tapering and macroeconomic uncertainties but remained optimistic about mitigating strategies and new opportunities.

Indicators of Tone

  • Acknowledgment of Challenges: Openly discussed headwinds like BSNL tapering and declining segments.
  • Positive Outlook on TCV and Deal Wins: Emphasized robust TCV and the quality of deal wins without relying on mega deals.
  • Future-focused: Highlighted investments in AI, GenAI, and other technology modernization efforts to drive future growth.
  • Balanced Optimism: While expressing confidence, management maintained a balanced view by recognizing dependencies on macroeconomic factors and client budget behaviors.

Comparison to Previous Calls

  • Consistent Improvement: Highlighted sequential margin improvements and strategic initiatives that align with ongoing growth strategies.
  • No Significant Change in Tone: Maintained a similar tone of cautious optimism as in previous communications, focusing on strengths while addressing potential risks.

Conclusion

TCS reported solid Q3 FY'25 results with steady revenue growth and improved margins. Management remains optimistic about future growth driven by strong TCV, strategic investments in emerging technologies, and revival in discretionary spend. While addressing analyst concerns regarding revenue growth, headcount, and contract tapering, management demonstrated confidence in their ability to navigate challenges and capitalize on new opportunities. The overall tone reflects a balanced approach, acknowledging current headwinds while maintaining focus on strategic drivers for sustained growth.