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Buy Tata Consultancy Services; target of Rs 3500: Sharekhan

April 20
21:25 2018

Sharekhan’s research report on Tata Consultancy Services

During Q4FY2018, Tata  Consultancy Services (TCS) delivered the  highest incremental dollar revenue ($ 185  million) on sequential basis in the history of Q4,  despite seasonality issues. Revenue growth was  driven by strong performance in verticals such  as energy & utilities and travel & hospitality  along with geographies in Europe and APAC  (Japan grew in double digits). TCS reported a  higher-than-expected constant currency (CC)  revenue growth of 2% QoQ in Q4FY18, led  by volume growth of 2% QoQ. On a reported  basis, revenues were up by 3.9%QoQ at $ 4,972  million. EBIT margins improved by 22bps  QoQ to 25.4% (below our estimates) despite  higher bonus payouts to employees, driven by  currency benefits (40 bps). Net income during  the quarter increased by 5.7% QoQ to Rs.6,904  crore. In FY2018, the revenue increased by 6.7%  YoY on CC basis and 8.6% YoY on reported  basis. EBIT margin contracted ~90bps YoY at  24.8% in FY2018, owing to wage hikes above  industry standards, localisation and structuring  innovative deals.

Outlook

we expect TCS to  continue to trade at a premium to its peers.  Hence, we upgrade our rating on the stock to  Buy from Hold with a revised price target (PT) of  Rs. 3,500.

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