Published on 12/10/2018 11:24:13 AM | Source: Reliance Securities Ltd

Buy Tata Consultancy Services Ltd For Target Rs.2,260.00 - Reliance Sec

Accelerating Growth Momentum in Key Verticals Positive

Tata Consultancy Services (TCS) reported a good set of numbers for 2QFY19 with revenue, EBIT margin and net profit exceeding our estimates. Revenue in CC terms rose by 3.7% QoQ (vs. our estimate of 3.3%), which comes on top of a 4.1% QoQ growth in the previous quarter. Its USD revenue rose by 3.2% QoQ implying a lower-than-expected cross-currency impact of 50bps (vs. our estimate of 128bps). On the margin front, aided by INR depreciation, its EBIT margin expanded by 148bps QoQ to 26.5% (85bps above our estimate) aided by INR depreciation. Notably, EBIT margin touched an 11-quarter high (the highest since 3QFY16) and is now within the IT major’s stated aspirational range of 26-28%. Aided by higher margin, its net profit rose by 7.6% QoQ to Rs79bn (2.3% above our estimate) despite substantially lower other income (down 40.4% QoQ).

From vertical perspective, TCS saw broad-based growth with the key BFSI vertical witnessing 3.5% QoQ growth in CC revenue growth, which comes on top of a 3.7% QoQ growth in 1QFY19. On the other hand, Retail & CPG revenue grew by 3.4% QoQ in CC terms, which comes on top of 3.6% growth in the previous quarter. This suggests accelerating growth momentum in these verticals, which account for nearly 48% of TCS’ revenue. Among other verticals, while CC revenue from Life Sciences & Healthcare, Technology & Services and MFG rose by 5.7%, 2.3% QoQ and 1.6% QoQ, respectively, TCS reported flat CC revenue in COMM and ENU verticals. Geo-wise, CC revenue from the UK saw robust growth of 6% QoQ, while Continental Europe revenue grew by 4.1% QoQ. The key North American geography saw 2.6% QoQ CC revenue growth, while revenue from Latin America rose by 7.1% QoQ.

Revenue Growth Positive, Margin Hits Aspirational Target Range

TCS won US$4.9bn TCV in 2QFY19 (similar to 1QFY19), implying book-to-bill ratio of 0.94x. BFSI accounted for the maximum value of US$1.5bn (US$1.6bn in 1QFY19). Like the previous quarter, TCS witnessed broad-based revenue growth in 2QFY19 with most verticals clocking healthy growth in CC terms, barring MFG, COMM and ENU. Improving growth momentum in BFSI and Retail verticals is the biggest positive, in our view. Looking ahead, we expect the IT major to clock double-digit growth in FY19E both in CC and USD terms. Digital hit 28.1% of total revenue (25%), clocking a robust 16.5% QoQ CC revenue growth. On margin front, TCS has hit a level within its stated aspirational EBIT margin range of 26-28% aided by revenue growth and currency.

Outlook & Valuation

TCS’ improved visibility in BFSI and Retail along with healthy outlook in other key verticals drives our underlying confidence on the business. With Digital contribution rising to >28%, healthy growth in this segment will move the needle meaningfully going forward. High pay-outs (100% of FCF) to shareholders in the form of share buy-backs along with improving business visibility will ensure the stock remains at elevated valuations. Upwardly revising our EPS estimates by 2-3% (factoring in INR/USD rate of Rs70 vs. Rs67.50 earlier), we maintain our BUY recommendation on the stock with a revised Target Price of Rs2,260 (from Rs2,170 earlier).

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