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Buy Tata Consultancy Services; target of Rs 2291: Prabhudas Lilladher

July 10
14:25 2019

Prabhudas Lilladher’s research report on Tata Consultancy Services

TCS posted a muted revenue growth of 1.6% QoQ USD (Ple:2.7%, Cons: 2.6%) with inline margin performance at 24.2%. Strong hiring in Q1 resulted in a net addition of 12,356 employees, highest in last five years. TCS has issued joining letter to 30,000 fresh graduates of which ~40% will be joining in Q1 & rest in Q2FY20E. This trend suggests strong demand environment for newer technologies. TCS digital revenues are at US$ 7bn (Q1FY20 annualized) growing at ~40% on YoY basis. TCS management is clearly echoing, ‘digital is non-discretionary thesis’. TCS continues to display signs of rising client relevance with a combination of large deal-wins momentum and a rising share of digital. We expect TCS to be a prime beneficiary of the commoditization of digital and AI adoption. We believe TCS to continue revenue momentum in FY20E on the back of 1) Strong TCV of deal wins at US$ 5.7bn (16% up YoY) in Q1FY20E & US$ 22bn TCV in FY19 offers us visibility in FY20E growth 2) Strong, sustained growth in digital (growing at 40% on YoY basis), 3) Core strengths such as lowest cost/attrition, large agile workforce. We would also like to highlight in last 8 quarters inspite of slight contraction in EBIT margins, TCS has always maintained its net profit margin at ~21%. We have estimated 10.1% & 10.3% USD revenue & EPS CAGR respectively for FY19-21E.

Outlook

We maintain Buy rating with target price of Rs.2291 valued at 22.5x FY21E earnings. Stock is currently trading at 23.1x/ 21.1x FY20E/21E earnings.

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