Moody's affirms Baa1 rating for TCS, Infosys, sees growth slowing in FY24

IT services companies expected to maintain businesses growth and market position

Rating agency Moody’s on Wednesday affirmed Tata Consultancy Services (TCS) and Infosys Ltd’s “Baa1” rating, reflecting moderate credit risk for entities into investment grade category.

The rating affirmation reflects the companies' position as leading information technology (IT) services providers with globally diversified and cost-competitive operations that translate into sustained profitability and robust credit profile, said Kaustubh Chaubal, senior vice president at Moody’s.

The outlook for both companies is stable, reflecting Moody's expectation that they will maintain their robust businesses and market position.

Moody’s said good financial discipline will aid TCS in preserving its large net cash/liquid investments position, while maintaining a solid balance sheet.

It is expected that Infosys will preserve a large net cash/liquid investments position while maintaining an extremely solid balance sheet, underpinning its strong financial profile.

Moody’s said revenue growth for IT companies could slow down as clients are cautious about discretionary IT budget allocations amid global uncertainty and fears of a recession. However, companies cutting costs and streamlining vendors are an attractive opportunity for IT firms that have a wide product suite and capabilities.

Infosys' revenues are expected to increase around 13 per cent for the financial year ending March 2023 (FY23), but growth may moderate to around 8 per cent in FY24. Meanwhile, improving employee utilization from hiring in prior years and steadily declining attrition amid global uncertainties will likely arrest any further margin pressure. Its EBITA margin is expected to remain around 24 per cent over Fy24 and Fy25.

TCS' revenue is expected to increase by around 8 per cent in FY23, but growth may slow to around 5.0 per cent in FY24 and FY25. Improved employee utilisation and declining attrition will likely arrest any further margin pressure, with its EBITA margin remaining around 25 per cent over fiscal years 2024 and 2025.

Moody’s said the two companies have excellent liquidity. TCS Ltd’s cash, deposits, current investments aggregating $8 billion and strong, recurrent cash flow will be more than sufficient to cover modest capital spending and shareholder returns over the next 12-18 months.

Infosys Ltd’s $3.9 billion in cash and cash equivalents along with steady cash flow from operations, will be more than sufficient to meet modest capital spending and dividends\ shareholder returns over the next 12-18 months, Moody's said.