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    TCS revenue growth to slow after strong Q3 results: Fitch Ratings

    Synopsis

    "We expect a relatively short recession in the US in 2Q23 and 3Q23 but the recovery is unlikely to be rapid with GDP growth still subdued at 1.6% in 2024. We forecast that the Eurozone QoQ GDP growth will be negative in 1Q23 before turning positive in the second quarter," Fitch said.

    TCS revenue growth to slow after strong Q3 results: Fitch RatingsAgencies
    After strong 3QFY23 results, Tata Consultancy Services (TCS) revenue growth is likely to slow in the financial year ending March 2024 (FY24) amid the global economic slowdown, according to Fitch Ratings.

    TCS reported a 19% year-on-year (YoY) revenue growth in the December quarter of FY23 and a 50 bps quarter-on-quarter (QoQ) expansion in the EBITDA margin, reflecting continued growth and the company’s ability to pass on higher costs to customers.

    Fitch expects TCS’s revenue growth to drop to 11%-12% in FY24 (FY23F: 18%), as its December 2022 global economic outlook forecasts US GDP growth to decline to 0.2% in 2023 (2022F: 1.9%) and eurozone GDP growth to decline to 0.2% (2022F: 3.3%).

    "We expect a relatively short recession in the US in 2Q23 and 3Q23 but the recovery is unlikely to be rapid with GDP growth still subdued at 1.6% in 2024. We forecast that the Eurozone QoQ GDP growth will be negative in 1Q23 before turning positive in the second quarter," Fitch said.

    At 12.35 am, the scrip was trading 0.3% higher at Rs 3,338. The stock has risen about 8% in the last six months, while it has plunged about 14% in the last one year.

    TCS received new orders worth $7.6 billion in 3QFY23 (2QFY23: $8.1 billion). The book-to-bill ratio declined to 1.07x in 3QFY23, suggesting some signs of an impending slowdown.

    TCS’s adjusted EBITDA margin reached a trough at 24.4% in 1QFY23 as the IT sector faced high wage pressures and employee attrition. The Fitch-adjusted EBITDA margin has improved since 1QFY23 as employee utilisation improved and the company passed on some of the higher costs to customers, but the margin remains below the average of 26.6% during FY19-FY21.

    "We expect employee attrition and wage pressures to subside as the global economy slows in 2023 even though TCS’s last 12 months’ employee attrition remained high at 21% in 3QFY23 (FY19-21 average: 10%), due to the continued shortage of skilled IT labour that led to the increased talent competition," Fitch Ratings said.

    "We also expect TCS to generate pre-dividend free cash flow of Rs 465 billion in FY24, which is likely to be almost entirely distributed to shareholders via dividends and share buybacks. We expect the company to continue to keep a net cash position of more than Rs 400 billion. We do not expect the company to undertake any major M&A," it said.

    Fitch’s Indian IT sector outlook is stable for 2023. "We expect Indian IT services companies’ revenue growth to slightly exceed global competitors’ in 2023 and 2024, as customers will most likely prefer lower-cost IT vendors amid an economic downturn," Fitch said.

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)




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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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