TCS buyback does little to lift investor mood as outlook muted

On 11 October, along with its September quarter (Q2FY24) earnings, the company announced a buyback of  ₹17,000 crore for  ₹4,150/share, a premium to Wednesday’s closing price of  ₹3,609.90 per share on the NSE.. Photographer: Dhiraj Singh/Bloomberg (Bloomberg)
On 11 October, along with its September quarter (Q2FY24) earnings, the company announced a buyback of 17,000 crore for 4,150/share, a premium to Wednesday’s closing price of 3,609.90 per share on the NSE.. Photographer: Dhiraj Singh/Bloomberg (Bloomberg)

Summary

  • Investors should brace for negative surprises from the earnings of peers in Q2, which is usually a seasonally quarter for the IT sector

They say the joy of giving lasts longer, but not so much in the case of Tata Consultancy Services Ltd (TCS) amid the present industry conditions. On 9 October, shares of the information services giant hit a new 52-week high of 3,679 apiece after its board proposed a buyback plan.

A buyback is a way of rewarding shareholders where a company buys back its shares usually at a premium to current prices.

On 11 October, along with its September quarter (Q2FY24) earnings, the company announced a buyback of 17,000 crore for 4,150 per share, a premium to Wednesday’s closing price of 3,609.90 per share on the NSE. TCS has also announced an interim dividend of 9 per share. This is the fifth buyback by TCS in recent years and certainly points to the company’s strong cash flow generation.

However, the lingering uncertainty around demand in the IT sector and no clear direction of a turnaround offset TCS’ efforts to boost investors’ confidence. This is somewhat mirrored by the stock’s muted reaction in early trade on Thursday. The mixed Q2 results coupled with subdued management commentary (read: reiteration of Q1FY24) did little to boost investor sentiment.

In constant currency terms, revenue growth was flat at 0.1% sequentially, impacted by ongoing softness in discretionary spending. The company witnessed slowdown in key verticals of BFSI and retail; among geographies, US and Europe were weak. On the bright side, Ebit (earnings before interest and tax) margin rose 110 basis points sequentially to 24.3%, ahead of analysts’ estimates. This expansion was aided by improved productivity, higher utilization and optimization of sub-contracting costs.

The divergence between a robust deal pipeline and muted revenue growth though remains a bothersome issue. The total contract value of orders stood at solid $11.2 billion, up 10% sequentially, with the book-to-bill improving to 1.6x. Cost takeout and consolidation deals (which basically help clients in optimizing cost) were in demand, the management said. The strong deal intake seen in recent quarters bodes well for medium-term revenue growth outlook. But revenue conversion is far from inspiring as clients re-prioritize IT spending.

“We expect lower revenue leakage in FY25 as majority of reprioritization of spending gets done with by FY24. Mega deals and large cost take-out and transformation opportunities will contribute higher to revenue growth in FY25 as well," said a Kotak Institutional Equities report dated 11 October. “These may not be sufficient for TCS to meet consensus estimates and require support from some level of recovery in discretionary spending, especially in BFSI, where there is limited visibility currently," it added.

In short, at least for FY24, the revenue visibility is still bleak. What this also means is that investors should brace for negative surprises from earnings of peers in Q2, which is usually a seasonally quarter for the IT sector. Meanwhile, citing macro uncertainties, the TCS management once again refrained from providing a timeline of demand recovery. Thus, leaving investors to shoot in the dark.

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