Tata Consultancy Earnings: Clients Ramp Up Interest in Gen AI While Scrutinizing Smaller Projects

Wide-moat Tata Consultancy TCS reported first-quarter earnings largely consistent with our expectations. Despite macroeconomic headwinds leading to increased scrutiny in dealmaking, we see a robust sales pipeline (indicated by the quarter’s 1.4 book/bill). As customers turn to Tata for Generative AI integrations, we think Tata’s moat sources, which are partially based on broad domain knowledge, remain strong. We maintain our fair value estimate for Tata Consultancy at INR 2,960. With shares currently trading fairly at INR 3,260, we think shares are overvalued.

First-quarter revenue was INR 594 billion, marking a year-over-year increase of 7% in constant currency, which is softer than the previous quarter. Life sciences and healthcare recorded the strongest growth year over year among all industry verticals at 10% in constant currency, followed by the manufacturing industry growing at 9% year over year in constant currency. Tata’s business in the U.K. continues to stand out with a year-over-year growth of 16% in constant currency, supported by two new deals in life and pension administration. Altogether, we continue to believe that the firm has ample opportunity in the European market, which historically had been less open to contracting non-European IT services firms. Tata’s operating margin of 23%, 10 basis points above the prior year period due to reduced subcontractor dependency. We believe management’s initiatives to increase efficiency helps Tata’s cost advantage and keeps the operating margin on our expected level. EPS for this quarter was INR 30.26.

This quarter marks the first appearance of K. Krithivasan as Tata’s CEO in the earnings call. We expect the new executive to maintain the firm’s current strategy and capital allocation measures. As the firm evaluates different options of developing capacity in generative AI, we have confidence that the wide-moat firm’s year-over-year top line growth will remain in the low-teens over the next several years.