Published on 11/01/2019 10:35:58 AM | Source: Emkay Global Financial Services Ltd

Accumulate Tata Consultancy Services Ltd For Target Rs. 2100 - Emkay

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Strong TCV of deal wins gives confidence of growth sustenance

* TCS reported slightly better-than-expected CC growth of 1.8% qoq vs. our estimate of 1.7% qoq, and said it is on track to deliver double-digit growth in FY19 (~11% CC growth yoy in 9MFY19). Nearly 20% qoq growth in TCV of deals won (USD5.9bn in Q3FY19), increasing deal pipeline and encouraging commentary for the BFSI vertical (up 8.6% yoy in CC terms in Q3) provide us visibility for a continuation in growth in the medium term.

* TCS attributed the improvement in TCV of deal wins and the strong pipeline to strengthening client relationships (No. of USD100mn+/50mn+ clients have increased by 8/5 yoy); management bandwidth (TCS has lowest attrition in the industry); and unreplicable offerings (both in terms of its integrated services and delivery governance).

* Margins, at 25.6%, were down 90bps qoq due to net negative cross-currency impact on margins (vs. our/Street expectations for a modest 25bps positive margin impact). Margins were also affected by (1) 60bps increase in sub-con expenses while chasing growth, which we view as the appropriate strategy and (2) ~7,000 net new hires in Q3FY19. TCS expects these expenses to normalize as it prepares itself better to service the deals it has won.

* Strong growth in deal win TCV; differentiated positioning attained via years of investments; higher scale that helps manage supply-side constraints in a relatively better way; and hunger for growth should enable TCS continue its outperformance over large-cap peers. We prefer TCS over Infosys and maintain it as our Overweight pick (See our latest thematic report). We have an Accumulate rating on TCS with a TP of Rs2,100 (20x FY21E EPS).


* Strong commentary by TCS but no good news for peers Continuation of strong deal wins amid increasing competitive intensity suggests increasing market share for TCS, given its differentiated positioning in terms of both service (Machine first) and delivery (Distributed agile)- refer to Exhibit 6. TCS attributed the revival in its BFSI growth (up 8.6%/6.1% yoy in Q3/Q2FY19 in CC terms) to its unique portfolio of services and agile delivery under which the company collaborates with clients/start-ups to build intelligent automation solutions, which we believe, should not be read as a secular uptrend in banking spends. For Telecom, TCS highlighted volatility and delay in 5G spends but indicated its readiness for new-age spends in the areas of network roll-out and software-defined networks. We believe that this indirectly questions the Street’s optimism for Tech M’s Telecom supremacy and expectation for an uptick in Tech M’s growth following 5G roll-out.


* Earnings outperformance to multiply stock gains; maintain Overweight We expect TCS’s earnings outperformance to continue irrespective of macro concerns and market dynamics, leading to significantly better returns in the long run (refer to Exhibit 4). We maintain our Overweight stance (refer to Exhibit 5) on the name with an Accumulate rating and a target price of Rs2,100 (based on 20x FY21E EPS).


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