Largely in-line quarter: TCS grew by a healthy 3.2% cc QoQ, (on an already high base of 3Q), which was largely in-line with CS-e of 3% (consensus 2.7%). Growth was broad-based across verticals. BFSI and retail led growth, while North America stood out among geographies. TCS closed FY22 with robust 15.3% cc YoY growth. Total contract value (TCV) came at $11.3 billion in Q422, including large deals of $1.8 billion. Even on excluding the large deals, TCS’ 4Q TCV grew 25% QoQ and 3% YoY.
Ebit margins in a close range in spite of sharp rise in costs: Operating margin was flat QoQ at 25%, 30 bps below our expectation of 25.3%. Net profit missed estimates by 1.6% in spite of in-line operating performance, due to lower other income. FY22 operating margins declined by only 60 bps in spite of the sharp rise in costs this year. Higher retention, hiring and subcontracting costs were offset by currency and operating leverage benefits. Attrition has started flattening for the company on a month-on-month basis.
Pricing improvement in renewals and new contracts: TCS highlighted that they are witnessing pricing improvement in renewals and new contracts. We note that ISG, in its 1Q CY22 review, highlighted 4-7% pricing increase with in-demand skills like cybersecurity and engineering commanding as high as 15% increase. We believe price increases should help the company going forward. TCS mentioned that it expects increments to be in the 6- 8% range in FY23 (similar to FY22).
Maintain outperform with a new TP of Rs 4,350: Management highlighted multi-year high growth environment with tech spends being prioritised. However, margins are expected to be volatile in the near term. Accordingly, we cut FY23E/FY24E EPS by 3-4% and introduce FY25E EPS of Rs 155. and we cut our TP to Rs 4,350 (from Rs 4,600) as we reduce TCS’ 12M forward P/E multiple to 30x (in line with Accenture’s last three months average multiple) from 33x earlier and roll forward our valuation to June-24 end. We reiterate our positive view on TCS.
4Q growth an margins largely in line: TCS 4QFY22 revenue grew by 3.2% QoQ in constant currency (cc) terms, marginally above our estimates of 3.0% (consensus 2.7%). Beat on USD revenue vs our and consensus estimates was 0.6-0.7%. On a cc YoY basis, revenue grew by 14.3% over 4Q21 and the company ended FY22 with cc YoY growth of 15.3%. Margins stayed flat QoQ at 25% (vs CS-e of 25.3%) in spite of the cost pressures, because of the operating leverage benefits from higher growth. FY22 margins came at 25.3%, a 60 bps decline from FY21 due to the rising cost environment.
Net profit missed estimates by 1.6% in spite of a largely in line operating performance, due to low other income. Management commentary on strong multi-year demand environment remained intact and deal pipeline continues to look robust.
Flat Ebit margin – operating leverage benefits offset by supply-side cost pressures: Margins stayed flat QoQ at 25% (vs CS-e of 25.3%) in spite of the cost pressures, because of the operating leverage benefits from higher growth. During the quarter, company saw -70 bps impact from tactical interventions (mostly for supply side issues) and -20 bps due to higher subcontracting costs. This was offset by +10 bps of currency benefit and +80 bps of benefits from operational efficiencies.
FY22 margins came at 25.3%, a 60 bps decline from FY21 due to the rising cost environment. Company lost -230 bps due to tactical interventions (mainly due to supply side pressures), -100 bps due to higher subcontracting expenses. This was offset by +30 bps positive currency benefit and +240 bps benefit due to operational efficiencies and higher growth.
Company expects near term margins to stay volatile given continued elevated hiring levels and reversal of Covid-led cost savings as travel and working from office resume. In the medium term, company expects to reach close to its aspirational margin band of 26-28%, while in the long term it should be able to achieve its aspirational margin range. Net profit missed estimates by 1.6% in spite of a largely in line operating performance, due to low other income.
Highest ever quarterly order book
Total contract value (TCV) came at US$11.3 bn in 4Q22, including large deals of US$1.8 bn. Even on excluding the large deals, TCS’ 4Q TCV grew by 25% QoQ and 3% YoY (Figure 16). The deal winnings were broad-based across verticals, geographies and deal sizes. North America TCV came at US$6.5 bn vs US$4-4.5 bn in 3Q22 and 4Q21. BFSI TCV was US$3+ bn vs US$2.9 bn in 3Q22.
Other key takeaways
There was substantial growth in headcount (21%% y/y) to 592k. Company added 100k freshers (vs target of 40k) and has set a target of another 40k fresher addition in FY23
LTM Attrition increased to 17.2% in 4Q22. However, on month-on-month basis, company sees flattening on attrition levels. LTM attrition will still look high for a few quarters due to the trailing high levels.