Published on 13/10/2017 4:03:13 PM | Source: Emkay Global Financial Services Ltd

Accumulate Tata Consultancy Services Ltd For Target Rs.2,860.00 - Emkay

* Q2FY18 performance was driven by sustained traction in volume growth (up 3.2% qoq as against 3.5% qoq in Q1FY18). The strong traction was driven by broad-based business momentum among clients across verticals and geographies.

*  Digital business grew by 5.9% qoq, accounting for 19.7% of revenue – the traction on TTM basis at 26% is at par with previous year’s growth rate. Commentary remains optimistic and management believes that TCS is emerging as partner of choice across clients given its size, and contextual & wide competencies.

* OPM improved by 170bps to 25.1%, driven by 50bps gain on account of favourable Fx and 120bps savings in operating cost and SG&A efficiencies.

* Our view on sustained outperformance gets further reinforced post Q2FY18 earnings performance and management commentary on business, deals and pipeline. We maintain our estimates and preferred pick status on TCS with TP of Rs2,860.


Well-rounded growth; commentary turns further positive

TCS has reported strong yoy growth across business segments and expects improved outlook for Retail/CPG vertical going forward. The improved outlook for Retail/CPG is underpinned by the clients’ trust in partnering TCS in their quest to compete with e-commerce peers through creation of better customer experiences (by increased usage of AR/VR, AI, Analytics and so on). TCS has been working with 4 of the top 5 players as per Digital IQ index in Retail and is emerging as the trusted advisor. In the BFSI segment, it has made a similar progress by aligning with clients in their need to integrate with core through contextual strength, thus moving business away from smaller vendors. It is working on several pilots across wide digital offerings and is focusing on large opportunities where banks are now opening up through APIs and are also integrating Fintechs through M&As. So, this development, along with the large multi-year Diligenta deal would mean gradual improvement in traction in BFSI as well. Management is confident about its traction in Business 4.0 opportunities and has notched 11 large wins across segments, besides seeing addition of 6 clients in US$50mn revenue bucket.


Best organic volume traction in Tier I space; Maintain ACCUMULATE

TCS has been consistently delivering sector-leading organic volume growth (Q2FY18 – 3.2% qoq and 9.7% yoy) among Tier-I peers. We believe that the sustained volume traction and the eventual acceleration would lead to an improved earnings growth performance in coming quarters. We have built in 9% revenue/EPS CAGR for TCS over FY18-20E and maintain our preferred pick status with ACCUMULATE rating with TP of Rs2,860, valuing at 18x Mar’20E P/E (implied valuation of 2x on PEG basis).


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