Revenue, TCV, Margins All Impress, BUY stays
TCS reported an excellent 1QFY19, with revenue, EBIT margin and net profit all coming in above our estimates. Revenue in CC terms rose by a strong 4.1% QoQ (our estimate 3.2%), while in USD terms, revenue rose 1.6%. The adverse cross currency impact of 250bps was higher than our expectations (132bps). On the margin front, a positive surprise was seen, with EBIT margin down just 36bps QoQ (103bps above our estimate), aided by currency and operational efficiency. Aided by substantially higher other income (+23.2% QoQ), net profit surged 6.3% QoQ (9.4% above our estimate).
From a vertical perspective, TCS saw broad-based growth, with the key BFSI vertical witnessing 3.7% QoQ CC revenue growth (5% including platform wins), while Retail & CPG grew 3.6% QoQ (CC). This suggests improving business visibility in these verticals, which we expect could be a key driver for TCS to achieve double digit revenue growth. Communications & Media grew at a healthy 5.1% QoQ, Life Sciences & Healthcare 4.3% QoQ and Energy & Utilities 5.2% QoQ (all CC terms). Thus, good traction was seen in key verticals, accounting for ~67% of the IT major’s revenue. Geo-wise, the UK saw robust growth of 8.2% QoQ in CC terms, while Continental Europe grew 5.3% QoQ. The key North American geography saw 3.7% QoQ CC revenue growth, while Latin America rose 2.6% QoQ.
TCV, Revenue Growth Positive, Margin on Track to Meet Aspirational Target
This is the first quarter where TCS has given details about total contract value (TCV). The IT major won US$4.9bn in TCV in 1QFY19, implying a book-to-bill ratio of ~1x, in-line with historical trend. Within TCV, BFSI accounted for maximum value of US$1.6bn (book-to-bill of 1.02x). Broad-based revenue growth was witnessed, as was the case in 4QFY18. Most verticals clocked healthy CC growth rates, apart from MFG and Technology & Services. The biggest positive was improving business visibility in BFSI and Retail. We expect the IT major to clock double digit growth in FY19. Digital hit 25% of total revenue (23.8%).We expect increasing proportion of Digital to aid revenue growth going forward. On the margin front, aided by revenue growth and currency, we believe TCS will report around 90bps margin expansion in FY19E, coming close to the lower end of its aspirational margin band of 26-28%.
Outlook and Valuation
TCS’ improved visibility in BFSI and Retail, along with healthy outlook in other key verticals drives underlying confidence on the business. With Digital contributing more substantially (25%), healthy growth in this segment will move the needle meaningfully going forward. High payouts (100% of FCF) to shareholders in the form of share buybacks, along with improving business visibility will ensure the stock remains at elevated valuations. We maintain our BUY rating on TCS with a revised TP of Rs2,170 (Rs1,810), as we raise our target PE multiple to 24x (20x), and also account for a higher INR-USD rate of 67.50 (65 earlier), which leads to 6-9% EPS upgrades for FY19E/FY20E.
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