TCS results were a bit weaker than expected with revenue 1.25 per cent below consensus, while operating margin at 24.5 per cent came just about inline. Constant currency (CC) revenue growth at 4.5 per cent year on year on the back of a weak 1.7 per cent growth for the same quarter last year (Q3FY24), reflects an extended period of anaemic growth.

Just about three years ago in January 2022, TCS shares hovered near ₹4,000 and the company too announced a buyback at ₹4,500 per share. Today, shares are hovering around the same ₹4,000-level, reflecting a torrid time for a medium-term investor (three-year horizon). Can it get better or worse for TCS investors from here?

Challenges far from over

While management comments post Q3 results indicate growth in CY25 is likely to be better than in CY24, it will still be a long crawl before the company gets back to double-digit CC revenue growth — possibly only in FY27 or FY28. And this is assuming no US slowdown materialises from here.  With the US and other developed market bond yields surging in recent weeks, uncertainty related to Trump policies and euphoric stock market sentiment pushing valuations to extremes on the foundations of the AI craze, the macro data points are getting a bit uncomfortable. One needs to hope none of these derail the recovery for TCS that is just about beginning to play out.  

Nevertheless, any recovery that plays out in CY25 is unlikely to be exciting. Few data points from results – negative 2.3 per cent y-o-y CC revenue growth in North America and negative 1.5 per cent in continental Europe (two regions account for 60 per cent of consolidated revenue), a marginal decline in headcount (by 1 per cent) indicate underlying trends remain sluggish. Further, while the management noted early signs of improvement in discretionary spending in BFSI (31 per cent of revenue), the surging bond yields in the US and Europe are not good news for this segment.

Weak trends for TCS and peers for nearly two years now, amid strong economic growth in the US and massive spending in AI, raises a question – if growth wasn’t good in this period, what is going to drive strong growth in future?   

And here in lies the valuation disconnect with the stock trading at 30 times trailing PE, which is at the upper end of its long-term historical range. Just before Covid struck, TCS was reporting around double-digit CC revenue growth and was trading much cheaper at 24 times. So today, the stock is still expensive relative to growth prospects and is not attractive at current levels.

The only thing that may work for TCS is that after underperforming peers in recent times, on a relative basis, TCS is likely to outperform the same peers — Infosys, HCL Tech, Wipro and Tech Mahindra, from here. These companies are trading at inline to a premium valuation to TCS today. This does not make sense when one considers far-superior profit margins, execution track record and the scale of TCS.