Tata Consultancy Services Earnings: Stabilized Spending Should Make for a Better Year Than Last

Wide-moat Tata Consulting Services reported first-quarter results that slightly beat consensus on the top and bottom lines. While total contract value, or TCV, for bookings was disappointing in the quarter, this came from a timing issue that should be undone as the year progresses. We think TCS is faring well given the macroeconomic environment, which is moderating IT services revenue in general, especially consulting work—due to its discretionary nature. While the near term has been tough, we continue to be comforted that interest in digital transformation projects remains unwavering, which we believe bodes well for TCS and its peers past this fiscal year when we may see a less spending-conscious terrain. We reiterate our fair value estimate of INR 3,050 as our confidence in TCS’ wide moat standing remains—but just not at the levels of the market. We view TCS as overvalued, as we recognize the massive opportunity AI brings to the IT services market, but we believe that some of this opportunity is just replacing former “bright and shiny” innovations in tech.