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TCS announces Rs 18,000 crore buyback; margins disappoint

ICICI Securities 13 Jan 2022

What’s buzzing:

TCS reported strong numbers on the revenue front but margins declined 60 bps QoQ amid supply side pressures. The company announced an Rs 18,000 crore buyback and also gave Rs 7 per share interim dividend.

Context:

The company reported dollar revenue of US$6,524 mn, up 3% QoQ, 14.4% YoY. In terms of revenue by geographies (in CC terms), North America market (52% of mix), grew +18.0% YoY, while UK and Continental Europe reported healthy growth of +12.7% and 17.5% YoY, respectively. Vertical wise, BFSI, retail & healthcare grew 17.9%, 20.4% and 16.3% YoY, respectively, while Manufacturing, Technology & Services and Media grew 18.3%, 17.7% and 14.4% YoY, respectively. EBIT margin contracted 60 bps QoQ to 25.0% as there was (-70 bps) wage hike impact and (-60 bps) impact due to higher SG&A, which was mitigated by pyramid optimisation (+60 bps), currency tailwind of (+10 bps).

Our Perspective

The company’s net adds for the quarter were highest ever as some of the hiring meant for H2 were front loaded. The demand outlook continues to be strong as clients are accelerating their spending on cloud transformation and new technologies to remain ahead of the curve. However, rising attrition (LTM basis it was higher but on sequential basis it was lower QoQ) amid supply side challenges continue to put pressure on margins. The company has been in active discussion with clients for price increase amid cost pressures and there has been a positive feedback on the same. We estimate revenue, EBITDA, PAT growth of 16.6%, 20.4%, 23.9%, respectively, over FY21-23E.

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