TCS Q1 outcomes: 5 the explanation why it isn’t an all-clear sign for TCS buyers

TCS reported a largely inline quarter with income and EPS marginally above consensus (about 0.8 per cent), whereas EBITDA was 1.5 per cent above. Most verticals and geographies noticed sequential development too. Given this, one may ask the query ‘Have the enterprise fundamentals within the IT sector bottomed out?’ If that’s the case, given TCS’ monitor document of best-in-class execution and historical past of efficiently adapting to a number of tech and non-tech disruptions within the trade, buyers can anticipate TCS to be on a development path. Nonetheless, given many elements that contribute to uncertainty at completely different ranges, it might be too early to have a good time in case you are a TCS investor. Listed here are 5 the explanation why Q1 outcomes just isn’t an all-clear sign and buyers want to remain cautious.

Lacklustre Progress

For one, on a year-on-year foundation, the numbers nonetheless look lacklustre. Fixed foreign money (CC) income development at 4.4 per cent stays weak. Key vertical BFSI, which accounts for 32 per cent of income, reported flat efficiency, and key geography North America reported a 1 per cent decline. Whereas CEO Krithivasan re-iterated that he believes FY25 can be higher than FY24, it doesn’t set a excessive bar given the truth that FY24 CC income development was a weak 3.4 per cent.

Two, at a trailing PE of 30 occasions the TCS inventory continues to be priced as if it’s a mid-teens share development inventory, in comparison with its present low single-digit development. Through the years FY17 and FY18 when TCS reported comparable low-single-digit share income development in the course of the trade shift from legacy to cloud/digital enterprise, TCS traded within the PE vary of 16 to 23 occasions. So at present valuation, any better-than-expected efficiency is already priced in.

Three, the long-term disruptive affect of IT on the enterprise of IT companies corporations like TCS continues to be unclear. In line with Krithivasan, folks tend to over-estimate the near-term optimistic affect of disruptive applied sciences, whereas they under-estimate the long-term optimistic affect. This displays his perception that AI advantages for TCS usually tend to stream within the medium to long run. From this, the indications are clear there’s unlikely to be any significant uplift to TCS enterprise or financials from AI.

With regard to long run, sure, there’s a sturdy case to be made that TCS can profit from AI, because it did from the cloud digitisation theme and associated disruptions within the earlier decade. Nonetheless, as talked about above, the explanation, buyers benefitted from the profitable variations of the corporate to technological evolution was that the corporate then was priced for the uncertainty in contrast to now, the place it’s greater than priced to perfection with regard to potential positive aspects from AI.

Slowdown dangers

4, the US recession menace nonetheless looms for Indian IT companies corporations. A fiery debate continues to be on, as as to if a recession has been delayed or derailed. It might be imprudent to conclude {that a} US soft-landing is for certain, simply because it was to conclude in early 2023 {that a} recession was sure. To this point in 2024, the Q1 US GDP at 1.6 per cent and estimates for round comparable development in Q2, mirror a slowdown in comparison with 2023 quarterly GDP development within the vary of 2-4.9 per cent. How this traits will stay an important barometer for the FY25 efficiency of TCS, given the corporate derives round 52 per cent of income from the area.

5, Accenture and TCS are globally the trade bellwethers for IT companies and consulting. Their monetary, share efficiency and valuations have a tendency to trace one another. But, what’s value noting is {that a} clear divergence has been rising just lately. That is one thing that we identified in our bl.portfolio version dated April 30 (Accenture units the tone for IT shares from right here). Their share efficiency and valuation have been taking a divergent development.  Over the past one yr, whereas Accenture shares are down 4 per cent, TCS shares are up 20 per cent. Within the final 5 years, the earnings CAGR for Accenture, at 10 per cent, has been marginally higher than that of TCS at 9 per cent. Whereas within the present FY, TCS is predicted to marginally outpace Accenture, given historical past and Accenture’s greater share in consulting/AI revenues, TCS’ present 20 per cent premium valuation is one thing to pay attention to. For many buyers targeted on Indian shares, why does this matter?  It’s as a result of over a time period, this differential is prone to get bridged by Accenture shares outperforming TCS shares. This makes TCS comparatively a much less engaging inventory for world buyers, or Indian buyers too who’re prepared to spend money on worldwide shares. The opposite method to have a look at it’s – world buyers are usually not exhibiting as a lot enthusiasm on IT companies/consulting shares as Indian buyers. Questioning why that is the case may assist tackle some blind spots.