Tata Consultancy Services Ltd. share price target

TCS reported a mixed Q3FY20 as revenue missed the mark for the third quarter in a row but EBIT margins staged a strong beat.

In a seasonally soft quarter, TCS reported weak growth (~0.3% QoQ, CC) dragged by key segments like BFSI and US. Near-term outlook was soft due to overhang in areas like large banks/retailers in the US and banks in the UK. Its industry leading growth, RoCEs and leadership stability will likely defend the premium However, the soft outlook for the near term and rich multiples (~23x FY21 EPS) should limit the upside in the stock. Everything else remaining constant what this implies is that, over the long term, the market is willing to pay a higher multiple for the same (or even lower) growth and RoCEs. This indicates that multiples are definitely pricing in premium for softer aspects like continuity in leadership, strategy etc. which are key for the long-term TCS trades at a rich multiple of 23x FY21 EPS. Its industry leading growth, RoCEs and leadership stability will likely defend the premium multiples over the long term.

We recently met the management of TCS to understand the demand environment (especially BFSI, retail and manufacturing), conversion of backlog into revenue and margin outlook. Management cited that growth of both BFSI and retail verticals (together account for 46% of total revenue) would further moderate in Q3FY2020E owing to continued weak spending in the capital markets segment in the U.S. and large banks in Europe and delay in deal closures in the retail space due to slowdown in decision making. Management also expects higher impact of furloughs, lower...

We recently met the management of TCS to understand the demand environment (especially BFSI, retail and manufacturing), conversion of backlog into revenue and margin outlook. Management cited that growth of both BFSI and retail verticals (together account for 46% of total revenue) would further moderate in Q3FY2020E owing to continued weak spending in the capital markets segment in the U.S. and large banks in Europe and delay in deal closures in the retail space due to slowdown in decision making. Management also expects higher impact of furloughs, lower...

& capital markets segments in US. Maintain Hold rating. We met Tata Consultancy Services' (TCS) management to understand the demand environment & to get an update on business outlook. Management mentioned that softness in BFSI & retail will persist in Q3FY20E also & it will be aggravated by impact of higher furloughs. Deal wins remain healthy (signed deals worth US$12.1bn in H1FY20) but revenue momentum has decelerated in H1FY20. BFSI & Retail contributes to 46% of the total revenues...

Tata Consultancy Services (TCS) largest IT exporter in India has witnessed strong demand but reported sluggish growth in revenue terms and in operating margins, TCS reported sluggish growth of 2.1% for Q2 FY20 on QoQ basis in constant currency terms

Q2 numbers fall short of Street expectations Tata Consultancy Services (TCS) provides a comprehensive range of IT services globally. The company serves clients across diverse industries, including finance and banking, insurance, telecommunication,...

Tata Consultancy Services (TCS) for the quarter ended Sep 2019 reported an early single digit growth of 2% in consolidated revenue to Rs 38977 crore compared to sequential previous quarter ended June 2019. As OPM contracted marginally by 10 bps to 26.2% from 26.3% in sequential previous quarter the operating profit was up by 2% to Rs 10225 crore. Hit further by lower other income and higher depreciation, the PBT was down by 1% qoq to Rs 10529 crore. Eventually the PAT was down by 1% to Rs 8058 crore compared to Rs 8153 crore in sequential previous quarter ended June 2019. After accounting for lower minority interest (down 27% qoq to Rs 16 crore) the net profit was down by 1% to Rs 8042 crore....

TCS' trinity of growth', scale and durability is challenged and we find our conviction displaced. While multiple attributes of scale/durability (offshore-leverage in digital, attrition) remain intact, the impact of macros and client specifics across core verticals dent the growth outlook. We expect USD rev/EPS CAGR of 8.2/7.7% over FY19-22E, factoring USD rev growth of 6.3/9.0/9.4% for FY20/21/22E. In its downward drift however, strong payout policy (80-100% of FCF) and industry-leading margins/RoIC offer respite to valuations. We downgrade TCS to NEUTRAL (BUY earlier) and strike it off our list of conviction picks following ~4% EPS cut and a weak growth trajectory (core verticals/ deceleration in digital). Our TP is Rs 1,975 at 20x Sep-21E (24x earlier).

TCS's Q2FY20 revenue growth of 0.6% QoQ in US$ (~1.2% in CC) was a miss to our forecast of 2.5% QoQ in US$ (3.1% in CC). Lower revenue growth and increased hiring impacted EBIT margin which declined by 15bps QoQ to 24% vs. our forecast of 25.1%. Similarly, EPS of Rs21.4, -1.1%/+3.9% QoQ/YoY missed to our forecast. Digital business (33.2% of revenue) continued to lead TCS's growth and grew by 28% YoY in CC, though lower than previous quarters. Deal wins remained strong with TCV of US$6.4 bn which is the highest in the last 6 quarters. We factor Q2FY20 miss and cut our FY20/21E revenue by 2.5%/2.8% and EPS by...