TCS set for double-digit growth in fiscal year 2025: Motilal Oswal

TCS in focus: Tata Consultancy Services (TCS), the country’s largest IT services company, on Thursday  reported strong financial performance in the third quarter of current fiscal year surpassing market estimates despite challenges in the demand environment, analysts said.

The company posted revenues of $7.28 billion, 1 per cent quarter-on-quarter (QoQ) increase in constant currency terms and 140 basis points above expectations. The growth was attributed to robust performance in India, with 26 per cent sequential increase, partly driven by the execution of the BSNL deal.

TCS reported deal wins of $8.1 billion, in line with expectations, and a book-to-bill ratio of 1:1. 

The company showed resilience in its operating margins, with operating profit improving by 70 basis points sequentially to 25 per cent, outperforming estimates by 50 basis points. This improvement was attributed to lower subcontracting costs and cost savings, offsetting adverse seasonality effects, analysts at Motilal Oswal said.

Despite challenges in the spending environment for IT services, TCS remains optimistic about its deal pipeline and bookings. The management expects a positive shift in client sentiment following encouraging comments from the US Federal Reserve in December 2023. 

While North America and BFSI were impacted by layoffs and project completions in the third quarter, TCS expects a return to growth in these segments in the fourth quarter.

The company's strategic initiatives, including the BSNL deal and a strong track record of deal wins, position TCS for double-digit growth in fiscal year 2025, according to the brokerage firm Motilal Oswal. 

The management anticipates a softening of attrition in the near term and envisions continued margin improvement through workforce optimisation.

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Despite a one-time cost associated with a legal payout to Epic System impacting reported profit after tax (PAT), TCS delivered 11 per cent profit growth in rupee terms in nine months of financial year 2024 (9MFY24). 

Additionally, the company generated a robust free cash flow of Rs 10,350 crore in the third quarter, contributing to a total cash and investments balance of Rs 45,700 crore.

The company also announced dividend of Rs 27 per share in the third quarter, including a special dividend of Rs 18 per share. 

Motilal Oswal analysts have maintained a positive outlook on TCS, reiterating a buy rating on the stock, with a target price of Rs 4,250.

As of 9:16 am, shares of TCS were trading 2.73 per cent higher at Rs 3,838.05 per share.