* TCS result is largely in line with our estimate, driven by a strong traction in Digital revenue (up by 14% qoq). At 25.2% (up 10bps qoq), OPM is slightly better than our estimate, spurred by robust volume and cost efficiency.
* Digital revenue accounts for 22% of total revenue and is growing at 30% on TTM basis, with revenue of over US$3.3bn. The traction is driven by broadening as well as deepening of clients’ digital transformation agenda.
* Management sounded confident on Retail vertical’s turnaround and is expecting doubledigit growth in FY19. However, no short-term turnaround is expected in the US-based large BFS clients’ spending, as the institutions have not firmed up their transformational strategy.
* Our view on TCS’ sustained financial outperformance gets further reinforced post the management’s commentary on business and deal pipeline, and the company’s emerging supremacy in Digital space. We maintain our estimates and preferred pick status for TCS with a TP of Rs2,900.
* Our view on sustained outperformance gets further reinforced post Q2FY18 earnings performance and management commentary on business, deals and pipeline. We maintain our estimates and preferred pick status on TCS with TP of Rs2,860.
Achieving leadership in Digital to support growth outperformance
Digital revenue grew by 14% qoq in CC terms, accounting for 22% of total revenue. On TTM basis, the Digital revenue has expanded by 30% with a cumulative revenue base of US$3.3bn, which clearly demonstrates the company’s emerging pre-eminent position since its metrics are well ahead of the industry growth rates. The company is benefitting from deepening of clients’ transformational agenda from point solution to enterprise level projects. TCS is emerging as a “partner of choice”, given its robust domain expertise on technology and the contextual understanding of clients’ business, which can help it to deliver the Digital transformation sought by the clients. During Q3FY18, TCS signed its largest deal in Digital space of ~US$50mn in TCV from Rolls Royce. Large US clients in BFS continue to remain circumspect with no short-term respite expected, as these clients not firm on their transformation architecture (no market share loss though). Insurance vertical across geographies and BFS in Rest of the World are growing for TCS. Retail is expected to grow in double digits in FY19. Europe growth is well spread out across verticals and sub-markets (Nordics, Benelux, Germany and France). Deal structure in this market is more complex and thus profitability will reach similar level as the US market as business scales up.
Best organic volume traction among Tier I, Maintain ACCUMULATE
TCS has been consistently delivering sector leading organic volume growth (Q3FY18 – 1.6% qoq and 10.4% yoy) among the peers. We believe the sustained volume traction and eventual acceleration would lead to improved earnings growth performance in coming period. We have built in 10% revenue/EPS CAGR over FY18-20E and maintain our preferred pick status with ACCUMULATE rating on TCS with TP of Rs2900 valued at 18x Mar’20E P/E.
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