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Tata Consultancy Services (TCS) delivered lower-than-expected performance across all financial parameters. Constant currency (CC) revenue growth on a y-o-y basis decelerated to 8.4% from 12.7/10.6% y-o-y in Q4FY2019/Q1FY2020. Revenue growth stood at around 1.5% q-o-q CC, below our estimates, owing to softness in BFSI and lowerthan-expected performance in retail and CPG and emerging markets verticals. EBIT margin during the quarter declined by 14 BPS q-o-q/250 BPS y-o-y to 24.0%, much below our estimate of 25.6%, owing to higher investments in people, lower revenue growth and lack of benefits from rupee. Digital business revenue growth decelerated to 27.9% owing to softness in retail, as retail has been a big adopter of digital technologies. TCS reported strong deal TCV of $6.4 billion (versus $5.7 billion in Q1FY2020) at the time of macro uncertainties, which indicates strong competitive positioning of TCS’s offerings. With weak results in H1FY2020, we believe the double-digit revenue growth target of TCS is at risk, considering weak seasonality of H2. Management hopes EBIT margin would bounce back in the coming quarters on account of pyramid rationalisation, improving utilisation and control on subcontracting expenses.

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