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TCS Q1FY23 review - Strong CC revenue growth; higher attrition a pain point

ICICIdirect Research 11 Jul 2022 DISCLAIMER

What's Buzzing

TCS reported 3.5% CC growth for the quarter, margins declined ~185 bps QoQ

Context

TCS reported strong numbers on revenues in CC while margins were weak. The company reported 3.5% QoQ, 15.5% YoY CC revenue growth for the quarter while due to cross currency headwinds of 220 bps, dollar revenue was only up 1.3% QoQ. In terms of revenues by geographies (in CC terms), the North America market (53% of mix), grew 19.1% YoY while UK and Continental Europe reported relatively muted growth of +12.6% and 12.1% YoY, respectively. Vertical wise in CC terms, BFSI, retail & grew 13.9% & 25.1% YoY, respectively, while manufacturing, technology & services grew 16.4% each. EBIT margins declined 186 bps QoQ, 150 bps impact from wage hikes while rest due to increase in subcontracting costs and travel costs. Attrition increased 230 bps QoQ to 19.7%.

Our Perspective

The company reported strong revenue growth for the quarter. Demand continues to be robust from US market as tech spends are intact so far while in UK market client conversations are revolving around high inflation there. Hence, there could be some moderation of revenues, going forward, in the region. EBIT margins are likely recover in Q2FY23 but continued higher attrition (especially onsite) are likely to push costs up in coming quarters. The company has given 5-8% wage hike across the base while strong performers have received higher wage hike (wage hike on-site was 4-5%). We do not see the company reporting lower than 25% exit margin (i.e. Q4FY23). Deal TCV on like to like basis was down both QoQ and YoY but is expected to pick up as the company hinted at US$7-9 bn TCV range, going forward. Employee addition moderated, especially on freshers, but Q1 is seasonally weak in fresher additions as freshers go for higher studies. We estimate 11%, 10.1%, 11.6% revenue, EBITDA, PAT CAGR, respectively, over FY22-24E.

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