Published on 17/03/2017 3:07:20 PM | Source:  Emkay Global Financial Services Ltd

Hold Tata Consultancy Services Ltd For Target Rs.2,420.00 - Emkay

Posted in Broking Firm Views - Long Term Report | #Tata Consultancy Services Ltd #IT Sector #Broking Firm Views Report #Emkay Global Financial Services Ltd.


Optimistic about demand trends; however awaits validation

* While remaining shy of sharing near term business outlook (Mar’17 quarter), Company continues to believe that macro improvement in US should translate into better client spending trends however it awaits more clarity on deal closures/signings during the month of Mar’17 to validate the trend

* TCS expects increased client appetite for offshore delivery in case of any adverse visa legislation; change in underlying variables could drive a reset in EBIT margin outlook

* TCS has done a good job at defending margins in recent quarters although margins continue to trend below the lower end of the guided range

* TCS trades at ~18x/16.5x FY18/19E P/E and with potential downside risks to margins/earnings; We retain HOLD with an a revised TP of Rs 2,420 (V/s Rs 2,350 earlier), based on 16x Mar’19E earnings (as we roll forward to Mar’18 V/s Dec’17 earlier)

 

Company optimistic about demand trends however awaits validation; change in underlying variables could drive a reset in EBIT margin outlook

While remaining shy of sharing any near term business outlook (Mar’17 quarter), TCS maintained its commentary that it shared in mid Jan’17. Company continues to believe that macro improvement in US should translate into better client spending trends however it awaits more clarity on deal closures/signings during the month of Mar’17 to validate this expectation. On margins, TCS indicated that it’s long held EBIT margin outlook of 26-28% is based on several underlying variables. It is not fixated to any particular range for eternity and is open to reviewing it in case any underlying variables see a change. Nonetheless, as we detail out below, while TCS’s EBIT margins for 9MFY17 are trending below the lower end of the range at 25.7%, it has done a very good job at cost optimization in recent quarters to defend margins despite revenue growth slowdown and currency challenges.

 

Valuations at 18x/16.5x FY18/19E P/E limit upsides, retain HOLD

TCS trades at ~18x/16.5x FY18/19E P/E and with potential downside risks to margins/earnings, we do not see any case for significant absolute upsides not withstanding our overall sectoral thesis of cyclical pick-up in demand in CY17/FY18. The recent INR appreciation only compounds the problem on sustaining margins with limited room to play with traditional margin levers and the need to continue making the desired Digital investments. We retain HOLD with an a revised TP of Rs 2,420( V/s Rs 2,350 earlier), based on 16x Mar’19E earnings (as we roll forward to Mar’18 V/s Dec’17 earlier).

 

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