IGI Logo

Weak Operating margin; but near to medium term outlook remains strong  

Our view and valuation

Overall, the revenue was inline, but the operating margin was below expectation led by wage hike and increase in other expenses such as Travel related costs. While, revenue grew by 4.3% QoQ in INR terms, margin dipped by 186bps QoQ. The growth remains broadbased across verticals. We remain positive on the stock as the near to medium term demand environment remains robust.  Deal booking remains strong across vertical led by multi?year tech upcycle.    Employee addition has been robust over last few quarters and provides steady revenue growth visibility. Though, the employee attrition remains high, but the incremental attrition has started moderating. We expect   operating margin to increase sequentially over next 3 quarters, aided by positive operating leverage, improving employee pyramid and moderation in employee attrition. Certain costs related to admin and travel have increased but these costs are not expected to reach precovid level as IT companies are expected to move to hybrid model of work. We estimate revenue CAGR of 12.2% over FY22?24E with average EBIT margin of 25.8%

We maintain BUY Rating on the stock with revised target price of Rs 3,758/share at 28x on FY24E EPS. We have reduced our target multiple from 32x to 28x to account for higher cost of capital and potential risk from macroeconomic concerns going ahead. The stock trades at PER of 24.3x on FY24E EPS.

Result Highlights

* TCS reported revenue of Rs 527.6bn( up 1.3% QoQ in USD terms; up 4.3% in INR terms). The USD growth was impacted due to ~100?130 bps cross currency headwind.  

* The growth was broadbased across verticals with higher uptick in Retail and CPG vertical( up 25.1% YoY in cc terms). The CC revenue growth was for the company was 15.5% YoY  during the quarter.

* EBIT margin decreased by 186 bps QoQ to 23.1%, led by wage hike and increase in other expenses. Cost of revenue grew 7.7% QoQ in the quarter.

* Demand environment remains  strong with deal booking of $8.2bn( vs $8.1 bn in Q1FY22) , with book to bill ratio of 1.2x.

* $100mn plus client increased by 9 YoY, while $50mn clients increased by 19 YoY.

* Net headcount increased by 14,136 during the quarter to close at 606,331 employees. LTM attrition increased by 230 bps QoQ to 19.7%.

* Announced dividend per share of Rs 8/ share with record date as 16 July 2022

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632

Above views are of the author and not of the website kindly read disclaimer