“We cut earnings estimates by 1.2-2.4% for FY25-27 considering the Q2 miss…Weak discretionary spending, client-specific challenges, slower decision-making, and client’s cautious behavior amid macro uncertainties weighed on revenue growth,” said an Emkay report on TCS post results.
The Tata subsidiary missed market estimates for the July to September quarter net profit after reporting a 1.08% quarter-on-quarter (QoQ) decline at Rs 11,909 crore. The drop was largely on the back of margin dilutive projects in the non-American region. Revenues during the July to September period also grew slower at 2.6% at ₹64,259 crore. America, which accounts for 51.7% of the total revenue, declined 1.8% from the June quarter.
“Overall, Q2FY25 was a modest quarter for TCS, mainly due to client specific issues…We expect growth for TCS as well as the sector to see a material uptick Q4FY25 onwards,” said a Nuvama (formerly Edelweiss) institutional equities report. K Krithivasan, chief executive at TCS, said, “As a general trend in the major markets, the demand outlook continues to remain cautious, as seen in the last few quarters.”
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The revenue composition was weaker than expected with higher-than-estimated contribution from the BSNL deal in India, partly negated by softness in mature market including America.
“H2 is generally soft and with the client specific challenges that TCS has spoken about, Q3 may not see a material turnaround. For FY26, TCS needs to contend with backfilling BSNL revenues,” Manik Taneja, executive director- IT services at Axis Capital.
While the overall deal momentum remained within the guided range ($7-9 billion per quarter) at $8.6 billion, it was lower by 23.2% from a year ago amid weaker margins and continued softness in client spending.
As a strategy, Krithivasan said TCS is investing significantly to create a large footprint in emerging growth markets including India, Asia Pacific, Latin American, Middle East and Africa. “We believe these markets are likely to turn into a sustainable driver of long-term growth,” he said.
Margins came in at 24.1%, down 60 basis points (bps) (0.60%) from the preceding quarter with a major drag coming from 50% increase in cost of equipment and software license. The Nuvama report also cut FY25E/26E earning per share (EPS) by -4.9%/-3.9% factoring in slightly lower growth and margins. Maintaining ‘Buy’ ratings, it revised the TCS target downwards to Rs 5,100 from earlier Rs 5,250.
