Buy Tata Consultancy Services Ltd : Margin expansion QoQ a positive surprise - ICICI Direct
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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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