Tata Consultancy Services Limited (TCS) has ended FY22 on a strong note with the highest order book of total contract value of $34.6 billion. Earnings for the March quarter (Q4FY22) also met expectations with 3.2% sequential constant currency revenue growth.
TCS saw the highest ever order flow of $11.3 billion during the quarter, which included two mega deals worth $1 billion each. Excluding these, its total contract value for Q4FY22 at $9.5 billion was still up about 3% year-over-year (yoy), management said in a post earnings conference call.
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TCS continues to see strength in the demand environment and is confident of its continuation in the medium term. Growing outsourcing and cloud transformation will continue to be one of the key demand drivers for TCS.
However, investors are not enthusiastic and the stock remained flat on NSE on Tuesday.
Margins remain a concern in the near term. In Q4, earnings before interest and tax (Ebit) margins were flat at 25% sequentially, but slightly higher than the consensus estimate of 24.9%. Year-on-year, margins slipped 180 basis points (bps), mainly due to supply-side pressure. One basis point is 0.01%. For FY22, TCS’s Ebit margin stood at 25.3% which was 60bps lower than the previous fiscal.
Operating margin at 25% is below TCS’ aspirational margin band of 26-28%. With TCS working towards increasing its operating leverage to achieve these levels, margins are expected to remain volatile in the near term, cautioned the management.
Travel costs have also started to return, leading to rising manpower costs, it said. The company has also announced salary hike from April 1 and the quantum is same as last year.
Margins will remain headwinds for the industry in FY13, although TCS is better positioned to meet the challenges, Kotak Institutional Equities said.
“A meaningful earnings upgrade for TCS will depend on its strong deal-win momentum and translates into higher revenue growth. The second is that if revenue growth moves between TCS and Infosys, the former outperforms. The third margin is the pace of recovery. On the flipside, if bearish risks play out in key markets in the US and Europe, the growth story goes for a toss,” said one analyst requesting anonymity.
In the past one year, the stock of TCS has gained almost 14% against a 29% gain in the Nifty IT index. Bloomberg data shows TCS stock is trading at 31.2 times estimated earnings for FY13, compared to 27.6 times for Infosys, which is set to announce fourth-quarter results today. Jefferies India said, “TCS’ premium valuation on Infosys may increase despite slow growth.”