Published on 6/08/2020 12:12:43 PM | Source: ICICI Direct

Buy Tata Consultancy Services Rs.2,400 - ICICI Direct

Posted in Broking Firm Views - Long Term Report| #IT Sector #Broking Firm Views Report #Quarterly Result #ICICI Direct

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Digital prowess, power of platform long term drivers…

Tata Consultancy Services (TCS) has strong digital (new age technology) expertise which has led to the company winning large deals over the years. Going forward, global digital technologies is expected to witness robust growth (CAGR of ~20% CAGR over next five years) mainly led by business going digital and increase in work from home scenario. TCS is expected to be a key beneficiary of this trend. In addition, TCS has over the years also built strong products and platforms that have enabled it to scale existing clients efficiently while also enabling it to win new clients. Further, TCS’ Secure Borderless Workspace (SBW) delivery model and Machine First Delivery Model (MFDM) framework will provide unique differentiation for its services. This will enable it to grow its revenues above industry in coming years. This coupled with strong cash flow generation and dividend pay-out keeps us positive on the stock from a long-term perspective.


Vendor consolidation, ramp up of deals, digital to drive growth

The company reported a poor set of Q1FY21 results mainly led by demand side challenges (dragged revenues by ~5.5% QoQ in CC terms) and supply side challenges (by ~1.4% QoQ). However, going forward, we expect TCS to report improving growth in coming quarters mainly led by receding challenges on supply side, ramp up of deals, vendor consolidation opportunities and traction in BFSI. The company also expects cloud, customer experience, automation and cyber security related digital technologies to gain traction in long term. We believe TCS could see a decline in FY21E revenues mainly due to a weak first quarter. However, we expect the company to register healthy growth in FY22E mainly led by ramp up of deal pipeline and acceleration in digital technologies.


Cost efficiency to drive margins

EBIT margins in the quarter were impacted by lower utilisation and sharp fall in revenues. Going forward, we expect FY21E margins to be flat mainly due to revenue decline in Q1FY21E.The company is planning to rationalise cost by putting a hiring freeze, no salary increments and other cost optimisation. We expect FY21E margins to be impacted despite cost rationalisation and expect a meaningful recovery in FY22E.


Valuation & Outlook

In the near term, revenues, margins are expected to be under pressure leading to a washout FY21E. However, TCS has the ability to bounce back as seen in the 2008 global financial crisis. Further, we believe there are long term drivers for the company in terms of market share gains, acceleration in digital technologies and ability to win large deals based on company’s execution. Hence, we remain positive on the stock from a long-term perspective. However, the current valuation factors in most of the positives. Hence, we maintain HOLD on the stock with a revised target price of | 2400.


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