In-line Performance; Challenging Year Ahead
Tata Consultancy Services (TCS) has delivered largely an in-line performance in 4QFY17, with its USD revenue growing by 1.5% QoQ (up 1% QoQ in CC terms). Volume growth came in at 1.7% QoQ, while CC pricing declined by 0.7% QoQ. Its EBIT margin declined by 28bps QoQ (11bps higher than our estimate), while net profit declined by 2.6% QoQ (1.7% below our estimate). Vertical-wise, BFSI clocked flattish revenue owing to cyclicality, while Retail faced disruption (similar commentary as Infosys) with revenue declining by 1.2% QoQ. Communications & Media clocked a strong 7.3% QoQ USD revenue growth, while Life Sciences & Healthcare clocked 4.2% growth. Geography-wise, though North American revenue decreased by 3.3% QoQ owing to completion of a project, it was offset by 4.5% QoQ growth in Europe.
Better Growth Expected in FY18E, but in Single-digits
Management has alluded to some improvements in a few businesses in FY18E, especially in Diligenta and Insurance, while Communications could directionally see improvement, even as quarterly volatility remains an issue in light of volatile macroeconomic environment and hazy visibility on IT budgets. Geographically, Latin America and India could grow above company average despite usual quarterly volatility. These are incrementally positive signs, which suggest some improvements in global macroeconomic conditions, in our view. Notably, TCS met a number of top clients in the US and Europe to assess trends in IT spend. Management believes clients intend to drive business transformationm though there are indications that there is some delay in IT spend. Thus, we believe it will be challenging for TCS and most other Indian IT firms to achieve double-digit USD revenue growth in FY18E, while quarterly volatility will remain a feature of business performance. Separately, TCS expects to keep dividend payout at last 6 years’ average of 80% of free cash flow post acquisitions.
Outlook & Valuation
Post 4QFY17 performance, we marginally trim down our EPS estimates by 2-4% for FY18E and FY19E. We expect FY18E to be the third consecutive year of single digit USD revenue growth for TCS and expect single-digit EPS growth as well. We expect EPS to grow by double digits in FY19E. At CMP, the stock trades at 16.4x FY18E EPS/14.7x FY19E EPS. As we believe that the stock is likely to continue to underperform the broader market in light of headwinds being faced by the sector, we maintain our REDUCE recommendation on TCS with a Target Price of Rs2,200.
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