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Hold Tata Consultancy Services; target of Rs 2,844: Edelweiss

January 12
23:41 2018

Edelweiss’ research report on Tata Consultancy Services

Tata Consultancy Services’ (TCS) Q3FY18 revenue, at USD4,787mn (up 1.0% QoQ) and EBIT margin at 25.2% were broadly in line with Street’s estimate. Key highlights: 1) BFSI declined by 1.5% QoQ on softness in North America; 2) Retail turned-around with growth of 6.4% QoQ; 3) digital revenues grew 13.9% QoQ/39.6% YoY, representing 22.1% of total revenues; and 4) traditional retailers are leveraging technologies to enhance value proposition to customers, implying an optimistic outlook. We believe with digital at 22.1% (growth of 33.9% YoY YTD), both US and Europe showing strong traction and current margins (25.2%) below the aspired 26-28% range indicate that things can only improve from here. Hence, we raise our target multiple to 18x from 16x earlier, and roll forward to FY20E. Maintain ‘HOLD’ with TP of INR2,844 (18x FY20E EPS).

Outlook

TCS reported in-line numbers. Few key positives include: 1) growth rate has bottomed out at 5-6% as digital is growing at robust rates and accounts for a substantial 22.1% of revenues; 2) margins declined from ~30% in FY14 to ~25%, limiting further downside (ex-currency); 3) retail has revived and BFSI may do well with recovery in the US; and 4) high cash generation with ~80% distribution, implying high dividend yield. Factoring in these positives, we raise our target multiple to 18x from 16x earlier, and rolling over to FY20E we peg our TP at INR2,844. However, due to mere 1.9% upside from current levels, we maintain ‘HOLD/SP’ recommendation/rating on the stock.

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