TCS share price drops 4% following lower than expected Q1FY23 results

Tata Consultancy Services is an IT services, consulting, and business solutions organization that delivers real results to global businesses. TCS offers a consulting-led, integrated portfolio of IT, BPS, infrastructure, engineering, and assurance services.

Moreover, TCS is one of the most valuable IT services brands globally and the largest Indian IT firm by market capitalization. It was the first prominent IT company to report its quarterly earnings for the Q1FY23 period on July 8, 2022. TCS’s Q1FY23 results fell short of the street’s estimates due to pressure on the margins and high attrition rates. In response, TCS stock fell more than 4% on the first trading day after the announcement of the results. Let us proceed to an analysis of the company’s quarterly performance.

TCS Stock reported robust growth in revenue in Q1FY23

The company’s revenue from operations increased by 4.3 % YoY to Rs. 52,758 crores in Q1FY23. The company’s EBIT decreased by 3.5 % YoY to Rs 12,186 crore from Rs 12,628 crore, and its margin shrank to 23.1% in Q1FY23 from the 24.96 % reported in Q4FY21. Consolidated EBIDTA for the reviewed quarter totaled Rs. 12,186 crores. The EBIDTA margin was 23.1 %, down from 25 % in the March quarter and 25.5 % in the June quarter of the prior year.

The company’s revenue for Q1FY23 was Rs 52,758 crore, up 16.2 %YoY from Rs 45,411 crore in Q1FY22. The Constant Currency (cc) revenue growth was up 15.5% YoY while the quarter’s net margin was 18%.

TCS, in a statement, said, “There was strong, broad-based demand across the different services, led by cloud, consulting & service integration, cognitive business operations, and enterprise application services.” Key themes driving G&T (Growth & Transformation) demand in Q1 were customer experience, cloud transformation, and sustainability. The Board of Directors, at its meeting held on July 8, 2022, declared an interim dividend of Rs. 8.00 per equity share.

TCS Stock reacts negatively as QoQ Profits declined despite growth in revenue

TCS reported a decline in consolidated earnings of 4.51% QoQ to Rs 9,519 crore for Q1FY23. It had declared a profit of Rs 9,959 crore in Q4FY22. It reported a YoY net profit increase of 5% in Q1FY23, from Rs 9,031 crore in the equivalent quarter of the previous year to Rs 9,519 crore.

Rajesh Gopinathan, Chief Executive Officer and Managing Director, said: “We are starting the new fiscal year on a strong note, with all-round growth and strong deal wins across all our segments.” Pipeline velocity and deal closures continue to be strong, but we remain vigilant given the macro-level uncertainties. Our new organizational structure has settled in nicely, getting us closer to our clients and making us nimbler in a dynamic environment. Looking ahead, we remain confident in the resilience of technology spending and the secular tailwinds driving our growth.

New order wins in Q1FY23 boost revenues of TCS

 The company’s order book stood at $8.2 billion. “Pipeline velocity and deal closures continue to remain strong,” said CEO Rajesh Gopinathan. Nine new clients were added to the $100 million+ band year over year, while 19 new clients were added to the $50 million+ band.

Among verticals, growth was led by retail and CPG (Consumer Pakaged Goods) (25.1%), communications & media (up 19.6%), manufacturing vertical (up 16.4%) and technology & services (up 16.4%). According to the regulatory filing, the company’s BFSI (banking, financial services, and insurance) vertical grew 13.9%, while the Life Sciences and Healthcare verticals saw growth of 11.9%.

Geographically speaking, North America had the highest growth rate at 19.1%, followed by continental Europe at 12.1%, and the UK at 12.6%. India experienced a 20.8 % growth in developing markets, followed by Asia Pacific at 6.2 %, Latin America at 21.6 %, and the Middle East and Africa at 3.2%.

The attrition rate is lower than last year but still high

 The company increased its workforce by 14,136 persons in Q1FY23, but attrition rates kept rising, reaching 19.7%. TCS employed a total of 606,331 people as of June 30, 2022. In Q1FY23, research and brokerage firms anticipated revenue growth of 3.6-4% sequentially CC, which was driven by expansion in demand and high order book wins in the Q4FY22. However, the same was impacted by a 2% cross-currency hit. Furthermore, the EBIT margin was expected to contract due to increases in salaries, visa fees, and supply-side challenges.

TCS continues to invest in the growth of organic talent as part of its entry into the growth and transformation industry. As a result of the company’s gradual acceleration of its return to office effort in Q1, around 20% of the personnel are now based in offices.

Technical Analysis of TCS Shares

 TCS shares are currently in a downtrend, forming lower highs and lower lows on a daily chart. Its 50-EMA of 3343 is an immediate hurdle; above this, we can expect a short-covering rally towards the 3470-3500 zone. While it has to sustain above the 3500 marks for any major buying interest.

On the downside, 3200 was a support level which was broken post Q1FY23 results. Below this, TCS stock is susceptible to a drop towards the 3000 level. Therefore, before the TCS stock breaks past its resistance and begins its upward path, investors should wait a bit and monitor if the stock price declines further.

Our View:

Although TCS reported rising revenues for the first quarter of FY23, margin challenges remain a source of worry. These are amplified by the fact that attrition is still high. On a broader level, the business is performing well despite reporting lower Q1 profits than anticipated because it has gained a number of new clients and has strong order book growth.

Technically, the TCS stock is in a downtrend and is likely to stay there until it successfully overcomes resistance, with a strong long-term support level at Rs. 3000.

The results of TCS were first announced in the IT industry in Q1FY23. While revenues grew, profitability was impacted this quarter. It remains to be seen whether other IT companies are likely to follow a similar trend. Long term investors are likely to use the fall in TCS’s stock price to accumulate the stock.

 

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

Research done by: Ketan Sonalkar, SEBI Rgn No INA000011255

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