Published on 23/03/2020 11:47:47 AM | Source: Motilal Oswal Securities Ltd

Neutral TCS Ltd For Target Rs. 2000 - Motilal Oswal

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Focus on employee safety and business continuity

We hosted a call with TCS’ management to understand the HR initiatives being undertaken to minimize COVID-19 disruption. Key takeaways:

No material impact on operations yet!

* It is still early to estimate the impact of COVID-19 on the business. TCS is assessing the situation one day at a time. So far, everything is normal on the operational front. Travel is suspended for all employees across the company.

* Onsite employees are working from home. In India, work from home was initiated last week for most of the employees.

* In certain functions and verticals (e.g., Life sciences), availing the work from home option is difficult due to the need for specialized software/hardware.

* The company is in discussion with clients to enable work from home in these functions and verticals as well. In case that option cannot be worked out, it may lead to some foregone revenue for the company.

* If the situation aggravates further, operations will shift to the business continuity mode where only the most critical businesses will be delivered.

* As of now, APAC is the most affected geography since there was close to two months of impact. However, the situation there seems to be improving recently.

* Given its limited presence in Italy, the impact due to lock down of the country will not be material.


 Focused on employee safety and business continuity

* While the deal flow status can only be known by the end of the quarter, so far the company has not faced any deal cancellations or deferrals.

* When new deals ramp up, resources shift from one location to another. In some cases, restriction of this movement should lead to delays in deal ramp ups and translate into a revenue impact in the immediate quarter.

* As core markets like Germany, France and the US started reporting cases, the company will have to assess the potential impact on the business.

* Travel and Hospitality verticals should get impacted due to the current situation. BFSI may have further downstream impact.

* The company made offers to 39k graduates who are expected to join in FY21.

* While no changes have been planned yet from hiring perspective, things can change going forward.


Valuation and view - Expect resilience despite near term uncertainties

* We downgrade our FY21-22E EPS by ~3-5% as we factor in (i) the negative impact of potential disruption due to COVID-19 and associated events and (ii) reset to our exchange rate assumption from INR70.5/USD earlier to INR72.5/USD.

* We like the company for its robust client reference ability, vertical focus, differentiated positioning in the HR supply chain and strong/stable management team. Despite the near-term uncertainties, we expect TCS to be resilient given its historical track record of adapting to multiple business challenges and technology change cycles.

* Over most of FY07-20, one-year forward P/E multiple of the stock averaged ~19x. Our target price of INR2,000 implies 19x FY22E EPS.


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