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Buy Tata Consultancy Services Ltd For Target Rs.4530

Margin expansion QoQ a positive surprise

About the stock: Tata Consultancy Services (TCS) is one of the leading IT service providers with a presence in BFSI, communication, manufacturing, retail & hi tech.

* Consistent organic revenue growth and industry leading margins (>25%)

* Stable management, robust return ratios (>RoCE 40%) & payouts (~70%)

Q2FY22 Results: TCS reported Q2FY22 results.

* US$ revenues grew 2.9% QoQ to $6,333 million, 4% QoQ CC growth

* EBIT margins improved 10 bps QoQ to 25.6%

* The company’s deal pipeline continues to be healthy at US$7.6 billion

What should investors do?

TCS’ share price has grown by ~3.6x over the past five years (from ~| 1,077 in October 2016 to ~| 3,976 levels in October 2021).

* We continue to remain positive and retain our BUY rating on the stock

Target Price and Valuation: We value TCS at | 4,530 i.e. 34x P/E on FY23E EPS

Key triggers for future price performance:

* TCS is key beneficiary of multi-year growth (15-20%) in digital technologies

* Increase in outsourcing in Europe, vendor consolidation and deal pipeline leading to revenue CAGR of 15.9% over FY21-23E

* Industry leading margins to continue; expect margins to improve 190 bps over FY21-23E

* Double-digit return ratios, strong cash generation and healthy payout.

Alternate Stock Idea: Apart from TCS, in our IT coverage we also like Infosys.

* Improving revenue growth, narrowing margins with industry leader and healthy payout

* BUY with a target price of | 1,930.

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