Published on 21/01/2021 11:39:31 AM | Source: Emkay Global Financial Sercvices Ltd

Hold Tata Consultancy Services Ltd For Target Rs.3,150 - Emkay Global

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An all-round beat

* TCS reported strong revenue growth of 4.1% qoq/0.4% YoY in CC terms, beating our and consensus estimates. Despite salary hike impact, Adj. EBIT margin expanded 40bps QoQ on the back of revenue acceleration, operating efficiencies and forex.

* Revenue growth was broad based, led by Manufacturing (7.1% CC QoQ), Communication & Media (5.5%), Life sciences & Healthcare (5.2%), and BFSI (2.0%). All geographies posted sequential growth. Cloud, analytics & insights, IoT, cognitive business operations, quality engineering and transformation platform services led growth.

* Management remains confident of delivering double-digit revenue growth in FY22 on the back of strong deal intakes (USD31.2bn TTM; 28% YoY), broad-based growth momentum and strengthening investments in technology in H2CY20.

* We raise our FY21/FY22/FY23E EPS by 2.8%/4.0%/4.6%, factoring in Q3 beat. We believe that TCS is well poised to benefits from acceleration in cloud adoptions and digital transformation opportunities, considering its end-to-end capabilities. However, valuations are rich. Maintain Hold with a TP of Rs3,150 (earlier Rs3,000) at 26x Mar’23E earnings.


What we like? Broad-based revenue growth performance; 40bps Adj. EBITM expansion QoQ despite salary hike; low attrition rate 7.6% LTM; robust cash generation


What we did not like? Weakness in UK banks and overall volatility in UK markets


Broad-based revenue growth; confident of delivering double-digit growth in FY22: Revenue growth was broad based across verticals, geographies and services, with overall CC YoY revenue growth returning to the positive territory after two quarters of negative growth. Growing demand for core transformational services and quick ramp-ups and revenue conversion from earlier deals helped TCS negate seasonal headwinds, delivering strongest growth in Q3 in the last nine years. TCS has seen strong rebound for growth in transformation services as customers seek to operationalize new models to grow in the new normal. This helped TCS achieve flat CC YoY revenue growth in Q3, a quarter earlier than its guidance. The company remains confident to deliver double-digit growth in FY22 on the back of healthy deal wins/deal pipeline and broad-based growth momentum. The deal intake remained healthy at USD6.8bn in Q3 (excluding deal with Postbank which closed on Jan 1, 2021) and included strong conversion of large deals (vs. largely small to medium deals in Q2).


EBTM held up despite wage hike pressures: Adj. EBITM expanded 40bps QoQ despite the salary increment roll-out (wef from Oct 1, 2020). Strong revenue growth momentum, operating efficiencies and favorable currency movement helped negate the wage hike pressure (-160bps). Management is confident of sustaining EBITM, based on anticipated revenue growth acceleration.


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