TCS revenue growth to slowdown in FY24: Fitch Ratings

Credit rating agency Fitch Ratings on Thursday said Tata Consultancy Services Limited’s (TCS) revenue growth is likely to slow in the financial year ending March 2024 (FY24) amid the global economic slowdown, after strong 3QFY23 results.

TCS reported 19 per cent year-on-year (yoy) revenue growth in 3QFY23 and 50bp 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 said.

Fitch expects TCS’s revenue growth to slow to 11 per cent – 12 per cent in FY24 (FY23F: 18 per cent), as Fitch’s December 2022 Global Economic Outlook forecasts US GDP growth to decline to 0.2 per cent in 2023 (2022F: 1.9 per cent) and eurozone GDP growth to decline to 0.2 per cent (2022F: 3.3 per cent), the rating agency said.

“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 per cent 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 received new orders worth $7.6 billion in 3QFY23 (3QFY22: $7.6 billion, 2QFY23: $8.1 billion). The book-to-bill ratio declined to 1.07x in 3QFY23 (3QFY22: 1.17x, historical average since 1QFY19: 1.24x), suggesting some signs of impending slowdown, the credit rating agency said.

According to Fitch, its adjusted EBITDA of TCS is expected to remain stable yoy at 25 per cent – 26 per cent in FY24 (FY23F: 25 per cent, 3QFY23: 25.8 per cent) as easing cost pressures are offset by a weakening demand environment.

“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 per cent in 3QFY23 (FY19-21 average: 10 per cent), due to the continued shortage of skilled IT labour that led to increased talent competition,” Fitch said.

Fitch also expects TCS to generate pre-dividend free cash flow of Rs 465 billion in FY24 (FY23: Rs 390 billion), 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 (FY22: Rs 440 billion). We do not expect the company to undertake any major M&A,” Fitch added.

As regards the Indian information technology sector, Fitch’soutlook 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 aneconomic downturn,” Fitch said.