Tata Consultancy Services Ltd. share price target

Revenue growth in both BFSI (8% YoY CC) and Retail (4.8% YoY CC) decelerated by 120bp+ compared to the previous quarter. BFSI growth decelerated to 8.0% YoY CC from 9.2% in the previous quarter, led by pockets of weakness in the large banks in Europe and capital markets in the US. Margin weakness was due to currency pressure, lower revenue growth and highest headcount addition in the quarter. Given the uncertain outlook on the major verticals (BFSI/Retail), combined with the operational blip in a seasonally strong quarter, we expect USD revenue growth to taper off by 170bp/40bp in FY20/21. TCS 2QFY20 EBIT margin shrank 250bp QoQ to 24% - the contraction is largely led by a dip in utilization and no benefits from currency which the company had anticipated.

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...

24%(Ple:25.6%, Cons:25.3%). BFSI & Retail contributes to 46% of the total revenues and are showing signs of weakness. We believe manufacturing (10% of total revs) weakness is yet to be seen as globally all the manufacturing PMI's are lowest in last 10 years. (The U.S. manufacturing PMI came in at 47.8% in Sept, the lowest since June 2009.) Digital growth slowed down in Q2FY20 to just 3.7% QoQ compared to average 8.8% QoQ in last 4 quarters. Despite of strong order booking of US$6.4bn, TCS management remained pessimistic about growth revival in 2HFY20. We note that 2H is...

Weakness in certain segment pockets could continue Weakness in certain pockets of banking financial services (capital markets & European banks), manufacturing (auto specifically in Europe) and retail (slowdown in decision making & delay in deal closures) were the main dragging factors in Q2FY20. Going by the management commentary in this respect, the situation largely remained unchanged with continued softness in capital markets & European banks. On the other hand, the position is strengthening in the insurance vertical and communication continues to do...

TCS signed strong TCV of $6.4 billion in Q2FY2020 (strong book-tobill of 1.16x), up 12% q-o-q and 31% y-o-y Management declared special dividend of Rs. 40 per share, in-line with its capital allocation policy (80-100% of FCF)...

Tata Consultancy Services (TCS) largest IT exporter in India has witnessed strong demand but reported sluggish growth in revenue terms, TCS reported sluggish growth of 0.4% for Q1 FY20 on QoQ basis in constant currency terms and 11.4%on YoY basis in rupee terms at Rs. 38,172 crs.

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,...

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.

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...