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Buy Tata Consultancy Services Ltd For Target Rs  4,395

Maintained operating margin in tough environment

Our view

Overall, we remain positive on the stock as the robust demand environment would help it to report double digit revenue growth for FY22/FY23. Deal booking remains strong and would help to sustain growth momentum. There are near term margin headwind in this supply constrained environment. However, we expect it to maintain stable margin of ~26% aided by positive operating leverage. We maintain BUY Rating in the stock with revised target price of Rs 4,395.

Result Highlights

* Reported revenue of Rs 468.7bn ( $6.3bn), ( up 3.2% QoQ in INR terms; up 2.9% QoQ in USD terms) which was slightly below consensus estimate of 473bn.  Constant currency revenue was up 4% QoQ(up 15.5% YoY). Growth was broad based across verticals. BFSI has touched $2bn of quarterly revenue rate in the quarter.

* EBIT margin was up by 8 bps QoQ to 25.6.(broadly as per estimates), led by focus on operational efficiency, in this supply constrained environment.

* The demand environment remained strong as the deal booking for the quarter remained strong at $7.6bn(up 25% YoY, excluding the large deal signed in Q2FY21).

* Attrition has picked up but the LTM attrition remained low at 11.9%, lowest in the industry. Net addition of ~19,690 employees to 5,28,748 employees at the end of quarter.

* Announced dividend of Rs 7/ share (Record date 19/10/21)

Valuation

The stock trades at PER of 29.5x on FY24E EPS. Robust deal booking and growing share of digital revenue provides strong visibility about revenue and margin outlook. Improved demand environment over next 2-3 years with stable margin and industry leading return ratios would support current valuation. We rollover to FY24 estimates and value the stock at 33x on FY24 earnings, arriving at target price of Rs 4,395/share

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