About the Stock

TCS is an IT services, consulting, and business solutions provider that has collaborated with many of the world’s major corporations. TCS provides an integrated portfolio of IT, business & technology, and engineering services that are led by consultants and driven by cognitive technology. Its distinctive location-independent agile delivery model, which is acknowledged as a standard of excellence in software development, is used to deliver this.

Quarterly Update

• TCS reported a mild quarter performance with steady revenue growth across all its segments (+5.60% YoY) at Rs. 63973 Cr. with BFSI (37% revenue share) and Communication, Media and Technology segment (19% revenue share) leading the revenue chart.
• Consolidated revenue in Q3FY25 grew by a steady rate of 5.6% YoY and 3.6% YoY growth in US dollars ($7,539 million) and a constant currency revenue growth of 4.5% YoY, driven by growth in with BFSI and Communication, Media and Technology segment. Revenue from segments such as with BFSI, Communication, Media and Technology and Manufacturing hiked substantially on a YoY basis (+4%, +21% and +4% respectively). Life Sciences and Healthcare segment contracted ~4% YoY.
• Operating margin stood at 24.5% YoY with sequential improvement of 40 bps QoQ, indicating better operational efficiency. Net margin was 19.4%, with EPS growing by 6.4% YoY.
• EBITDA hiked by ~4% YoY to Rs. 17034 Cr. with EBITDA margin shrinking slightly by 42 bps at around 26.63% owing to rise in cost of equipment and licenses (+200% YoY) and a significant rise in employee cost (+3.5% YoY).
• EBITDA for BFSI segment grew by 8% YoY to Rs. 6403 Cr. whereas, Consumer Business delivered a stable EBITDA growth of 15% YoY, 10% QoQ (Rs. 2971 Cr.). For Manufacturing segment the EBITDA stood at Rs. 2042 Cr. (+9% YoY). Communication, Media and Technology segment saw a decline of 16% YoY (+1% QoQ) in EBITDA, while Life Sciences and Healthcare segment’s EBITDA shrinking 6% YoY at around Rs. 1816 Cr.
• TCS’s PAT figures witnessed a hike of 12.14% YoY (+4.09% QoQ) with PAT margins improving ~113 bps. Digital Services segment was the front runner of PAT growth with ~26% YoY.

Key Product and Platform Growth

• Q3FY25 saw increment in new deals and go-lives in all major products and platforms for TCS.
• Ignio, the AI-driven cognitive automation suite, secured 30 new deals and 9 go-lives, TCS BaNCS, the flagship product for financial services, achieved 4 new wins and 7 go-lives, TCS BFSI Products and Platforms had 3 new wins and 2 go-lives, Quartz, a blockchain and AI platform, had 1 new win and go-live, TCS TwinX, a digital twin solution, achieved 3 new wins and 1 go-live, while TCS ADD, a life sciences platform, had 3 go-lives.
• While TCS OmniStore and TCS Optumera, AI-powered commerce and retail merchandising suites, both had new deals and go-lives both had new deals and wins, TCS iON, a platform for digital assessment and learning, added 38 new wins, with over 17 million candidates assessed.

Segmental Growth

BFSI segment grew by 0.9% YoY while Consumer Business Group grew by 1.1% YoY. Life Sciences & Healthcare saw a decline in growth with 4.3% YoY and Manufacturing hiked with 0.4%. Technology & Services declined by 0.4% YoY, Communication and Media declined by 10.6% YoY, Energy, Resources, and Utilities grew by 3.4% YoY and Regional Markets had a significant growth of 40.9% YoY.

Client Metrics

As of December 31st, TCS has more than 1,300 clients generating over $1 million in annual revenue each. In Q3FY25, TCS added 3 new clients in the $100 million-plus revenue category, bringing the total number of such high-value clients to 64.

TCV growth

TCS achieved a strong TCV of $10.2 billion in Q3FY25, a significant figure indicating large deal wins. North America TCV was $5.9 billion, BFSI TCV was $3.2 billion, and the consumer business contributed $1.3 billion to the TCV. There was double-digit growth in TCV YoY despite the absence of any mega deal wins.

Geographical growth

In major markets, the UK grew by 4.1%, while there was a decline in North America ( -2.3% YoY) and Europe (-1.5% YoY). India led with a 70.2% YoY growth followed by Middle East, Latin America, Asia Pacific with growth percent at 15% YoY, 7% YoY and 5.8% YoY.

Workforce Stats

• At the end of Q3, TCS had 607,354 employees, representing 152 nationalities, with women making up 35.3% of the workforce. LTM attrition in IT services increased by 13%.
• Over 25,000 promotions were awarded in Q3FY25, bringing total promotions for the fiscal year to 110,000+.
• TCS to continue to invest in talent development through skill-building initiatives with Campus hiring progressing as planned leading to an increased number of hires expected next year.

Accounts receivable was at 74 days DSO while, net cash from operations was $1.54 billion, which is 105.3% of net income, showing strong cash generation. Free cash flow was $1.45 billion, and TCS had $7.28 billion in invested funds at the end of the quarter.

Con Call Highlights

Demand Levers

Clients continue to prioritize cost efficiency and business transformation, with strong growth in GenAI, AI, and cloud services with investments in agentic AI are expanding, allowing for greater automation of commercial processes. Technology modernization, SAP S/4HANA, cloud adoption, AI-driven data strategies, and cybersecurity remain top priorities. Client IT budgets are predicted to remain constant in FY25 with early hints of discretionary expenditure resurgence in BFSI and retail.

Segment wise Demand Levers

• In the BFSI segment, TCS assisted a worldwide bank in implementing an AI-led fraud detection system, which enhanced fraud detection by 18%, decreased false positives by 25%, and speed up reaction times by 50%.
• In Consumer & Retail segment, retail markets expanded, as seen by a premium fashion retailer collaborating with TCS to develop an omnichannel strategy in the EU, reducing market entrance time by 30%.
• While client budgets remained flat in Technology, Software, and Services, TCS continued to grow, such as by cooperating with a semiconductor giant to co-create AI-driven technology for CPUs, GPUs and SoCs.
• In Life Sciences and Healthcare, AI is being used in genomics, cell treatment, and digital manufacturing. TCS assisted a medical technology business in digitizing device history records and modernizing its processes.
• Manufacturing saw difficulty owing to macroeconomic concerns, but significant deal wins indicate future development, with a focus on smart manufacturing and AI-based automation.
• The need for Communications, Media, and Information Services remains cost-driven, but telcos are investing in company expansion and IT efficiency.
• Growth markets include cloud migration, ERP transformation, and digital infrastructure, with TCS’s global delivery centres and investments ensuring long-term development prospects.

Product based deal wins

TCS BaNCS completed a core banking modernization for Zions Bancorp, positioning the bank for greater market responsiveness and improved customer experiences while TCS BFSI Products and Platforms  cracked 15-year contract with Ireland’s Department of Social Pension to implement an Auto Enrolment Retirement Savings Scheme for 800,000 workers. The company also completed a complex migration for Scottish Widows, servicing 3 million UK customers.

Capital Allocation

TCS announced a dividend of ₹76 per share, including an interim dividend of ₹10 and a special dividend of ₹66 per share with regulation changes or tax changes will also be factored while announcing capital allocation policy and special dividend for this quarter.

Workforce Decline

The headcount decline slight in Q3FY25 (-0.89% QoQ) and stood at 607354 at the end of the quarter due to seasonality while on a long-term basis, there will be some correlation between the headcount and growth.

Bottoming out of key segments

The healthcare and life sciences industry is likely to bottom out in Q4, with growth picking up thereafter. Manufacturing is also expected to stabilize over the same time period. The US healthcare business is awaiting policy clarity, which is delaying discretionary expenditure. Once regulations are established, spending is expected to restart, accelerating the sector’s recovery.

BSNL Deal

The ramp-down of the BSNL contract is expected to be a margin lever for Q4FY25 with 70% of the contract has been completed, and as it tapers off, it could positively impact margins by reducing third-party costs. While TCS does not expect double digit revenue growth but revenue outlook is stronger QoQ with international businesses in focus. TCS qualifies for RFP floated by BSNL for 5G upgrade and would participate in the same.

Margin Aspiration

TCS aims to exit Q4 with margins of 26%-28%, although this is not guaranteed. Despite flat growth, the third quarter showed sequential improvement, and efforts will continue for greater improvements in the fourth quarter, albeit seasonality remains a barrier.

Furloughs Spillover into Q1FY26

TCS recognizes that, while furloughs may stretch into the early weeks of January in some regions, this represents a small proportion of total furloughs. As a result, they predict some furlough recovery in the coming quarter, although it will not be total owing to the spillover effect in specific locations.

Deal wins throughout segments

Deal activity has been high across all verticals, particularly BFSI, CBG, and Europe. There is a shift toward more sophisticated projects, such as application modernization, cloud, AI, and data. Deal cycles have shortened, with larger transactions closing more quickly, indicating enhanced decision-making. While there are no huge deals, TCS is still confident in managing revenue through new deals.

Valuations

• In present times, the stock of TCS is trading at multiple of 29.3x 135 EPS at the CMP of Rs. 3,945. In book terms, trading 14.1x than its book value of Rs. 281.  As of today, the ROCE and ROE of the company is at 64.3 percent and 51.5 percent, respectively.
• Tata Consultancy Services Ltd. announced an equity dividend of Rs. 124.00 per share throughout the last 12 months. The dividend yield of Tata Consultancy Services Ltd. is 3.17% at the current share price of Rs. 3,945 with most recent dividend announcement of interim dividend of Rs. 10 per share and Special Dividend of Rs. 66 per share.

Investment Rationale

• • TCS elevated its partnership with NVIDIA at the beginning of the quarter, launching industry-specific AI solutions through a new business unit within its AI.Cloud division. This extends their five-year relationship by integrating TCS’ domain experience with NVIDIA’s AI technology. The unit will provide tailored AI adoption methods using NVIDIA’s AI platforms and TCS’s proprietary architecture. NVIDIA NIM microservices and AI Foundry are among the solutions that help organizations scale AI use across industries.
  • TCS remains confident in compensating for the revenue loss from its mega-deal with BSNL, which is nearing completion. The BSNL contract is 70% complete, which indicates that its financial impact will begin to taper in Q4 itself. TCS is searching for several opportunities to close the revenue shortfall from this contract, whether through domestic or overseas partnerships.
  • Tata Consultancy Services Ltd. plans to upgrade BSNL’s 4G network to 5G after the sites and frequency ranges have been identified. The existing radio equipment can be upgraded with a software update, and BSNL will have adequate coverage with the activation of 100,000 4G sites. Full deployment is scheduled in May 2025.