Tata Consultancy Services Ltd. share price target

TCS' growth, scale and durability are its key strengths. Growth in digital, momentum in deal wins and strong hiring trend are positive demand indicators. TCS' offshore leverage in digital (location independent Agile framework), outperformance in BFSI (vs. Accenture) and superior execution (margin/attrition differential) stand out. We expect 10/9% rev/EPS CAGR over FY19-22E. Strong FCF generation (90% FCF/PAT), payout policy (80-100% of FCF) and >4% FCF yield will support valuations. Key risks include INR appreciation, adverse macros and increase in onsite workforce crunch. We maintain BUY on TCS following a miss on revenue and an inline margin performance. Our TP is Rs 2,420 at 24x Jun-21E EPS, with ~2% cut in earnings estimates.

TCS had a mixed Jun'19 quarter with a miss on operating performance but healthy deal wins (US$ 5.7bn, +16.3% YoY). Softness in the BFSI and retail verticals led to below-estimated revenue growth of 2.3% QoQ CC, while onsite supply pressure weighed on operating margins. With a slow start to the year, double-digit growth in FY20 looks a tough ask. We trim FY20/FY21 EPS by ~7% each on revised revenue and currency assumptions, roll over to a Jun'21 TP of Rs 2,360...

We factor Q1FY20 revenue miss and fine-tune our forecast. We now forecast revenue (US$)/EPS CAGR of 10%/9.1% over FY19-21E. We also fine-tune our TP to Rs2,195 (vs. Rs2,228 earlier) based on 22x FY21E. We believe that any decline in the stock due to revenue growth miss in Q1FY20 should be used to ACCUMULATE. Key Highlights and Investment Rationale Q1FY20 see another quarter of double-digit growth at 10.6% YoY in CC Revenue growth of 1.6% QoQ in US$ (~2.1% in CC) missed our forecast of 3% QoQ in US$ (3.5% in CC). As expected, BFSI (30.8% of revenue, +1.3% QoQ in US$), impacted...

TCS came out with mixed set of numbers in Q1FY20, revenue and EBIT margin were slightly below our as well as street estimate; however PAT for the quarter was ahead of our estimate owing to higher other income. Digital business continued to show traction, though BFSI vertical remained on a weak footing. We are positive on the stock from longer term perspective, however in the near term we see limited upside due to expensive valuation and tepid management commentary. We maintain our...

Uphill task to achieve double digit revenue growth in FY20E The growth in banking & financial services tapered mainly due to weakness in capital markets and European banks. This trend is expected to continue, which will be a key dragger for revenue growth in the near term. In addition, 8.1% QoQ dip in deal TCV at US$5.7 billion does not augur well for the revenue growth trajectory. Further, a weak revenue performance in a seasonally strong Q1 will make it an uphill task for the company to achieve double digit growth rate in FY20E. To achieve double digit growth in FY20E,...

revenue growth, with 10.6% y-o-y on constant currency (CC) terms. The softer-than-expected revenue growth can be attributed to slower growth in the BFSI and communication vertical, while CC growth in lifescience and heathcare and regional markets remained strong. EBIT margin declined by 94 BPS q-o-q to 24.2%, a tad below our expectations, owing to 230 BPS q-o-q impact from both wage revision and rupee appreciation, partially offset by operational efficiencies. Digital, with an annual run rate of $7 billion+, continues to grow strong...

9 July 2019 (10.6% YoY CC in 1QFY20 on the base of 12.5% in 4QFY19) and EBIT margin contraction (-150bp QoQ/- 90bp YoY to 24.2%) were both in line with our estimates. PAT grew 10.8% YoY to INR81b, implying a 6.2% beat, helped by higher other income and lower ETR (23.4% v/s our estimate of 24.2%). Adjusted for the accounting changes toward leases (~INR1.18b), the EBIT margin would have been 23.8%, marginally below our estimate. TCS signed deals totaling USD5.7b in 1QFY20 v/s USD4.9b in 1QFY19 and USD6.

TCS's Q1 performance was a tad weaker than our/Street estimates. CC revenue growth of 2.3% qoq, coupled with ~90bps qoq fall in EBIT margins to 24.2%, missed expectations slightly, although net profit beat was supported by higher other income. The company indicated that Q1 was impacted by weak macros but it continues to strive for double-digit' growth in FY20E, and hopes remain pinned on a strong Q2. Mid-term confidence reflected from strong hiring and continued deal win momentum in Q1FY20. We continue to believe that FY20 is a relatively difficult growth year for the sector after the rebound through CY17 and CY18. Prefer Tier-I names over Tier-II on a relative basis....

TCS' annual report highlights key elements like differentiated strategy, expanding participation in clients' transformational spends, engagement with other stakeholders and contextual knowledge to win transformational deals. During FY2019, the outperformance in revenue growth was driven by strong growth in digital business, superior execution and higher adoption of Business 4.0 framework by its enterprise clients. TCS has aligned its strategy with Business 4.0 framework as more than 90% of its enterprise clients have adopted at...