Buffering... Near-term growth snags could keep TCS in a bind

Yet, positioned for revenue growth with recent strong deals, driven by a strengthening US economy

- RAM PRASAD SAHU

As was the case in the October-December (Q3) quarter of 202324 (FY24), the country's largest software company, Tata Consultancy Services (TCS), reported a better-than-expected operational performance, even as revenues were marginally lower than what the Street was working with.

While sequential revenue growth of 1.1 per cent missed most estimates, margin expansion continued for the third consecutive quarter.

Profitability (before interest and tax), also called Ebit margins, at 26 per cent, was up 100 basis points (bps) sequentially and was the highest in 12 quarters.

Since the start of FY24, the software major has added 280 bps to its margins as cost optimization moves have continued even as growth has moderated. The gains on the margin front were on account of lower subcontracting costs, higher productivity, and better utilisation, which led to a 190-bp improvement. However, these operational gains were partly negated by higher third-party costs and travel expenses, which reduced the margin effort by 90 bps.

The company expects pricing and pyramid restructuring to help it maintain its operating profit margin in the aspirational range of 26-28 per cent. While the subcontracting lever is exhausted, other levers like pyramiding, pricing, and utilisation are still there, say analysts at Nuvama Research, led by Vibhor Singhal.