Published on 30/11/2020 9:37:25 AM | Source: Motilal Oswal Financial Services Ltd

Neutral Tata Consultancy Services Ltd For Target Rs.2,900 - Motilal Oswal

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Above estimates; better-than-expected recovery

Broad-based growth; deal pipeline remains strong

* Tata Consultancy Services (TCS) impressed with revenue growth of 4.8% QoQ CC (v/s est. of 2.5% QoQ CC), coupled with EBIT margin expansion of 260bp QoQ (v/s est. of 120bp QoQ). Broad-based growth across geographies and verticals indicates healthy recovery across segments. The company reported very strong deal wins of USD8.6b.

* A healthy deal pipeline, continued healthy cash conversion (OCF/PAT of 126%), and reduced attrition have also been encouraging. We expect TCS to be relatively better positioned (v/s the sector) to navigate the current challenges and continue to gain market share from weaker/smaller players in vendor consolidation deals.

* We upgrade our EPS estimates by ~6% for FY21/FY22E as we relook at our revenue growth / margin estimates. While we continue to be positive on the company, we remain Neutral on rich multiples. The stock currently trades at ~26x FY22E EPS.


Beat on revenue and margins

* TCS reported revenue (USD) / adj. EBIT / adj. PAT growth of -2%/12%/5% YoY v/s our estimates of -4%/4%/-1% YoY. In 1H, Revenue (USD)/ Adj.EBIT/Adj.PAT grew by -5%/5%/-5% YoY.

* Barring Communication & Media (-2.4% QoQ, CC), growth was broad-based across verticals. Retail (8.8% QoQ, CC), Life Sciences and Healthcare (6.9% QoQ, CC), and BFSI (6.2% QoQ, CC) grew above the company average growth rate (4.8% QoQ, CC).

* Continental Europe (6.1% QoQ, CC) grew largely on account of countries’ faster recovery from the pandemic and initial investments made by the company. Key geographies such as North America (3.6% QoQ, CC) and the UK (3.8% QoQ, CC) also reported decent growth.

* Improved utilization resulted in gross margin expansion of 150bp QoQ.

* Adjusted for a one-off legal provision made by the company (INR12.2b), EBIT margins expanded by ~260bps, largely owing to impressive control on the SGA front (14.7% v/s 15.8% in 1Q).

* Cash conversion (OCF/PAT = 126%) continued to be very healthy. DSO of 65 days has also been at an all-time low.

* Deal wins of USD8.6b were very strong. Notably, this includes the PhoenixStandard Life deal (USD2.5b), for which the company awaited certain regulatory approvals.

* It saw net headcount additions of 9.9k in the quarter. Attrition (LTM, IT Services) at 8.9% has been at an all-time low as well.

* In line with its capital allocation policy to return majority of its profits to shareholders, the board has approved a buyback of INR 160b (at INR 3000/share). They have also announced an interim dividend of INR 12/share. In 2017/18, TCS had done couple of similar buybacks of INR 160b each. Currently, TCS has a cash and bank balance of INR 470b and generated FCF of INR 187b in 1HFY21.


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