Buy Tata Consultancy Services Ltd For Target Rs.3,600 - Yes Securities
Result Highlights
* Reported strong financial performance as it reported revenue of $5,899mn (up 5% QoQ in USD terms) with revenue in INR terms at Rs 437bn(up 4% QoQ), despite INR appreciation during Q4FY21. The revenue growth was led by growing demand for core transformation deals and ramp up of previous deal wins. The recovery in the BFSI vertical is on expected lines.
* In terms of verticals, BFSI showed strong recovery in the quarter. BFSI (+7% QoQ, +13.3% YoY), Retail and CPG (+4% QoQ, ‐0.9% YoY), Life Sciences and Healthcare (+3.8% QoQ, +19.3% YoY), Manufacturing (+3.9% QoQ, +1.3% YoY), Technology & Services (+2.8% QoQ, +3.9% YoY) and Communications & Media (+1.8% QoQ, ‐ 4% YoY).
* Favourable business mix and positive operating leverage continues to drive increase in EBIT margin as it increased by 20 bps QoQ
* It reported one of the strongest Q4 in terms of revenue growth since FY07 and strongest EBIT margin since Q2FY16.
* Deal booking continues to remain robust as it reported deal wins of $9.2bn, up 35% QoQ (highest quarterly deal closure in a quarter). FY21 orderbook at $31.6bn, up 17% YoY.
* Reported net addition of 19,288 employees in the quarter with IT services LTM attrition at 7.2% vs 7.6% QoQ.
* It also announced interim dividend of Rs 15/share for the quarter
Our view:
TCS is expected to maintain strong growth momentum led by deals in core transformation area and accelerated adoption of digital technologies. EBIT margin would remain in target band of 26‐18% led by favourable business mix and operating leverage. Its deep contextual knowledge of clients would help it to sustain deal win momentum. Free cash flow generation will remain strong with limited reinvestment requirements. It trades at PE of 27.8x on FY23 earnings. Initiate coverage on the stock with BUY.
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