TCS Q4FY24 Earnings Analysis
Tata Consultancy Services (TCS), India's largest IT services player, commenced the IT-results season for the fourth quarter of FY24 with impressive figures despite macro challenges.
Tata Consultancy Services (TCS) reported their Q4 FY2024 earnings on 12th April. TCS concluded the fourth quarter (Q4) and the full financial year (FY) 2024 with strong financial results, reporting the highest sequential revenue growth in many quarters, an all-time high total contract value (TCV), and an operating margin of 28% for the quarter, the highest in the last 12 quarters.
The market reacted positively to the earnings and the stock closed in green gaining about 0.5%.
Financial Analysis:
For the financial year 2024, TCS's revenue grew by 6.8% in rupees, 3.4% in constant currency terms, and 4.1% in dollar terms. The operating margin for the year was reported at 26.5%, with a net margin of 19.13%.
Cash Flow from Operations stood at 100.3% of Net Profit. TCS aims at returning 80-100% of the Free Cash Flow back to investors and with the same, they have announced a dividend of Rs.28 per share.
While the North American and European market contracted, revenue growth was driven by UK, India and MEA markets. The management cited wars and upcoming elections as the primary reasons for lower discretionary IT spending. Management also reinforced that core IT spending is being done by companies as per regular schedule and there is no reduction over there.
Order Book and Client Analysis:
Order Book TCV for Q4 stands at $13.2 billion and for the full FY24, TCV is at $42.7 billion. The TCV for Q4 is mostly driven by one large deal. There has been smaller wins as well, but the management is cautious about client spending.
The management has also commented that the clients are getting cost conscious and have been looking for cost optimization strategies. This include either cutting down on large discretionary IT spending or reducing the scope of it.
Generative AI has been the buzz for TCS’ clients this quarter. The pipeline deals for GenAI has doubled to $900 million.
For the full FY24, the company has won 200 engagement for GenAI.
Management also commented that the spend for GenAI is not coming out of a separate budget from the clients. TCS usually embed AI services within large digital transformation projects.
Vertical wise, Manufacturing and Regional Marktets proved out to be the biggest growers. There was visible lack of demand in BFSI, Tech and Communication sectors.
Y-O-Y, TCS has added new clients in all sizes of the client profiles. Although, the number of $100m+ clients have increased by only 2, the management is happy that they were able to retain their biggest clients as well as add couple of more in this uncertain macro environment.
Headcount and Attrition Analysis:
This is the first time in 19 years that TCS has reported a decrease in headcount on a full financial year basis. The total headcount for the company stood at 601,546 down about 13,000 from the previous year. The attrition rate was 12.5%.
Employee headcount is an important metric for IT companies as it serves as an leading indicator for upcoming TCV and revenue. Amongst the declining headcount, TCS’ CHRO has commented that negative headcount shouldn’t be correlated to lack of demand. He cited that:
The company is taking productivity initiatives due to which efficiency per employee is on the rise.
The company is also hiring and deploying lots of sub-contractors, especially in the smaller markets.
Wage Hikes will be beginning from April and will range from 4.5-7%. Top performers will get double digit hikes.
In terms of hiring:
TCS has already gone to the priority colleges and have made offers.
They are also amidst starting their NQT test soon at a national level.
Other Highlights:
The company announced that their COO, Mr. N Ganapathy Subramaniam (NGS) will be retiring next month.
NGS is the COO of TCS since February 2017, with additional directorship roles at Tata Elxsi Limited and Tata Communications Limited.
Prior to his COO position, he served as Executive Vice President and Head of TCS Financial Solutions, overseeing non-linear growth strategies and product development.
With over 40 years in TCS and the Indian IT industry, he has held key leadership positions, including heading the Banking and Financial Services practice, contributing to TCS's knowledge base and domain-centric offerings.
The company clarified that they won’t be hiring a new COO and instead the responsibilities will be distributed amongst the key management personnel.
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