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Healthy deal wins a key positive…

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%)

Q1FY22 Results:

TCS reported Q1FY22 results.

* US$ revenues grew 2.4% QoQ to $6,154million

* EBIT margins declined 133 bps QoQ to 25.5%

* The company’s deal pipeline continues to be healthy at US$8.1 billion

What should investors do?

TCS share price has grown by ~3x over the past five years (from ~| 1200 in July 2016 to ~| 3,257 levels in Jul 2021)

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

Target Price and Valuation:

We value TCS at | 3800 i.e. 30x P/E on FY23E EPS

Key triggers for future price performance:

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

* Increase in outsourcing in Europe, vendor consolidation and deal pipeline leading to revenue CAGR of 13% over FY21-23E  Industry leading margins to continue expect margins to improve 142 bps over FY21-23E

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

Alternate Stock Idea:

Apart from TCS, in our auto coverage we also like Infosys.

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

* BUY with target price of | 1,650

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