Buy Tata Consultancy Services Ltd For Target Rs. 3,600 - Yes Securities
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Result Highlights
* Excluding India business which was impacted by Covid19 2nd wave, overall performance was broadly in line. USD revenue grew by 2.4% on qoq in cc terms. Reported USD revenue growth was up 2.8% QoQ; while INR depreciation during the quarter helped it to post 3.9% QoQ growth in INR terms).
* Excluding regional market and others, revenue up by 4.1% in cc terms which seems healthy. This is also getting reflected in International Sales which is up by 3.9% QoQ in cc terms ($ growth at 4.2% in Intl’l sales) vs India business down 20% QoQ in INR terms ‐ seems due to adverse impact from second wave of covid.
* The growth was broad based across segments except for communication & media.
* EBIT margins at 25.5% down QoQ by 130bp qoq vs our expectation of ~100 bps dip. Headwind during quarter included wage hikes and visa cost.
* Deal booking at $8.1bn vs $9.2bn QoQ and $6.9bn yoy; broadbased across geographies and verticals
* Employee count increased by 20409 net employees qoq ‐ appears strong with attrition at 8.6% vs 7.2% qoq, increase in attrition is led by higher demand for talent.
* It also announced Interim dividend at Rs7/share vs Rs5/share YoY
Our view:
We remain positive on the stock and maintain our BUY rating with an unchanged target price of Rs 3,600 as Book/Bill ratio of 1.4x provides strong revenue visibility. Deal momentum would remain strong led by traction in cloud migration and other digital technologies, aided by its deep contextual knowledge of its clients’ technology landscape. It is well on track to post double digit revenue growth for FY22/FY23 and expected to sustain FY21 EBIT margin of ~26% for FY22 led by favourable business mix and operating leverage. Free cash flow generation will remain strong with limited reinvestment requirements and that should help to sustain dividend payout. It trades at PE of 27.6x on FY23E earnings.
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