Tata Consultancy Services Ltd. share price target

While growth momentum remains intact for now, one needs to be cautious on the likelihood of the same sustaining through the course of CY19. Barring Automotives and Hi-tech, traction is sanguine in other segments of the business

Tata Consultancy Services (TCS) the largest IT services exporter in India has witnessed strong demand in Q3FY19 across segments. Strong traction was also seen in digital space, digital space reported strong growth of 53% for Q3 FY19 on YoY basis.

Other income jumped 59% to Rs 1163 crore and interest cost fell 88% to Rs 16 crore. After providing for depreciation (up 2% to Rs 519 crore), PBT went up 3% to Rs 10711 crore. Provision for taxation grew 6% to Rs 2590 crore after which PAT grew 2% to Rs 8121 crore....

Currency fluctuations weighed on dollar revenue growth TCS delivered muted performance in Q3FY19 with consolidated revenue growth of 0.7% QoQ in dollar terms due to cross-currency headwinds. However, constant currency (CC) revenue growth stood at 1.8% QoQ/12.1% YoY in an otherwise seasonally weak quarter. The CC growth YoY (the highest in 14 quarter) was driven by continued acceleration across key verticals and geographies. Vertically, the growth was powered by BFSI (8.6% YoY), retail (10.5%), Telecom (10.8%) and life-sciences (15.7%), while UK (25.1%) & Europe (18%) led growth geographically. Further sustained momentum in digital business (grew strongly...

Maintain BUY with TP of Rs 2,430, at 24x Dec-20E EPS, supported by leading organic growth within tier-1 IT and >60% RoIC, >4% FCF yield & >3.5% dividend yield. TCS posted acceleration in revenue (in-line) supported by strong digital traction (53% YoY) and continued revival in BFSI. However, margins were lower on increased hiring and higher sub-contracting expense (both indicative of buoyant demand). Rev came at USD 5,250mn, 1.8/12.1% QoQ/YoY CC with digital at 30.1% of rev (USD 6.3bn rev annualised).

Robust TCV Growth Signals Strong Biz Momentum; Margin Disappoints Tata Consultancy Services (TCS) has reported a decent CC revenue growth of 1.8% QoQ in 3QFY19, while USD revenue came in softer-than-expected at US$5,250mn (+0.7% QoQ, below our estimate by 0.8%) owing to a higher-than-expected adverse cross-currency impact. Its TCV order bookings grew by a robust >20% QoQ to US$5.9bn (vs. US$4.9bn in 2QFY19), with bookto-bill rising strongly to 1.12x (vs. 0.94x in 2QFY19), which signals a strong traction in underlying business growth. On the flip side, its EBIT margin declined by 90bps QoQ to 25.6% (missing our estimate by 73bps) owing to higher wage cost and SG&A; expenses. Net profit rose by 2.6%...

We largely maintain our FY19E/20E revenue (in US$) and tweak EPS forecast by -1.0%/1.7% (FX of Rs70 for Q4FY19 and FY20). We maintain ACCUMULATE with new TP of Rs2,084 (vs. Rs2,121 earlier) based on 22x FY20E. Q3FY19 CC revenue growth of 1.8%/12.1% QoQ/YoY despite seasonal weakness Both QoQ CC growth and US$ growth of 0.7% was in-line with our forecast. While smaller verticals like Life Sciences & Healthcare (7.6% of revenue; +15.7% YoY in CC) and Energy & utilities (4.7% of revenue; +18.1% YoY) grew faster, larger verticals like Retail & CPG (16.5% of revenue; +10.5% YoY) also saw good growth. Importantly, BFSI (30.8% of revenue) saw improvement in growth to +8.6% YoY....

There was disappointment at the margin level as EBIT margins declined 90 bps QoQ to 25.6% (vs. our 27% estimate). The margin decline was mainly on account of net cross currency headwind and increase in employee and sub-contractor cost (negative 60 bps) Macro uncertainty clogs visibility of double digit growth beyond FY19E TCS had a weak show in the quarter with a miss at revenue growth mainly on account of 2.1% QoQ decline in traditional business. Growth was a miss due to de-growth in BFSI (0.6% QoQ) and flat growth in retail...

10 January 2019 EBITDA increased 21.7% YoY (5% miss) and PAT grew 24.1% YoY (our the US, as evident from the 70bp QoQ uptick in subcontractor expenses. TCS cited that demand on the ground was very healthy and broad-based across regions and verticals. This was reflected in deals TCV of USD5.9b v/s USD5b in the previous two quarters, with healthy contribution from North America (USD3b+), BFSI (USD2b+) and Retail CPG (USD800m+). With respect to elevated onsite cost, TCS expects it to rationalize over a period of time via investments in training and also passing some of it to clients. The trend of supply shortage was called out by a few companies in 2QFY19 (INFO, MTCL and HEXW), which cited challenges in demand fulfilment at onsite. TCS 9MFY19 EBIT margin of 25.7% is after YoY INR depreciation of 8.4% for this period.

We recently met the management of TCS to discuss its outlook on the demand environment, revenue growth trajectory going forward, its digital strategy and potential challenges relating to H1-B visa issues...