Shares of Tata Consultancy Services Ltd (TCS) hit a new 52-week high of ₹3,679 apiece on Monday, after the information technology (IT) company on Friday said it will consider a buyback of its shares.
Buyback is a way of rewarding shareholders wherein a company buys back its shares usually at a premium to current prices.
TCS on Wednesday announced a buyback of ₹17,000 crore for ₹4,150/share, higher than the current market price of ₹3,542.55. This buyback is in line with its capital allocation policy and certainly points to its robust cash flow. However, since the IT industry is going through a challenging phase, the move does offer comfort. Moreover, dull September quarter (Q2FY24) earnings performance and subdued management commentary leaves investors scrambling to find a direction.
Amid low expectations, TCS’s year-on-year constant currency (CC) revenue growth fell to a multi-quarter low of 2.8% in Q2. Key verticals of BFSI and retail slowed down. Among geographies, US and Europe disappointed.
But the bigger worry is the divergence between its strong deal pipeline and muted revenue growth. The total contract value of TCS’s orders stood at a solid $11.2 billion, rising sequentially and year-on-year, backed by two large deals.
Cost takeout and consolidation deals (which basically help clients in optimizing costs) were in demand, the management said. Strong deal intake seen in recent quarters bodes well for medium-term revenue growth outlook. But the pace of revenue conversion is far from inspiring. This contrast means the road to recovery could be long and tedious.
Overall, revenue visibility for FY24 remains bleak due to soft discretionary demand, as clients re-prioritize IT spends. “TCS results support our view of slower growth for longer,” according to Ambit Capital. The research house sees the risks of growth versus margin trade-off as TCS underperformed global IT giant Accenture (outsourcing) over the last 16 quarters. So, Ambit is pencilling in a CC revenue growth of 4.3/7.4% in FY24/25 for TCS compared to 13.7% seen in FY23.
On the bright side, Ebit (earnings before interest and tax) margin rose 110 basis points sequentially to 24.3%, beating analysts’ estimates.
This expansion was aided by improved productivity, higher utilization and optimization of sub-contracting costs. The management is hopeful of more improvement on this parameter, but the quantum of expansion remains to be seen. Plus, TCS’s expensive valuation is a bother in the current backdrop. At FY25 price-to-earnings TCS is trading at multiple of almost 25 times, a premium to close competitor Infosys Ltd, showed Bloomberg data.
Meanwhile, citing macro uncertainties, the TCS management once again refrained from providing a timeline for demand recovery—thus, leaving investors to shoot in the dark.