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Strong business outlook

Tata Consultancy Service Ltd. (TCS), a part of Tata Group, is a leading IT services company in India in terms of revenue and market capitalisation. TCS has robust fundamentals backed by its diversified service portfolio in verticals and across geographies. The five key industry verticals clusters for revenue generation are 1) BFSI 2) retail and consumer business 3) CMT 4) manufacturing and 5) others includes life sciences, healthcare and energy etc. BFSI is the major revenue driver segment for the company accounting for around 40% of the total revenue. Over the last five fiscals, TCS’s revenue grew by a CAGR of double digit at 11.7% to Rs1,918 bn. Beside healthy growth in top line, the company also maintained strong margin (last five fiscal avg. EBIDTA margin of 27.2%) and return ratios (avg. RoE of 37.0% over last five fiscals).

* TCS clocked 8 -fiscal high growth of 16.8% in sales during FY22. Business scenario of IT sector turned more buoyant due to Covid 19 pandemic as the business started focusing more on the digital infrastructure. Total contract value (TCV) has been remained strong on the back of robust demand from BFSI vertical mainly from North America. Demand environment seems healthy owing to cloud adoption by businesses, growth opportunity in AI/ analytics & security.

* In the latest quarter Q4FY22, TCS recorded its highest ever increase in deal wins. The company clocked record order book of $11.3 bn in terms of total contract value (TCV) ($7.6 bn in Q3FY22)taking cumulative TCV to $34.6 bn for the FY22. Meanwhile attrition rate also reached at all time high level at 17.4%. We believe attrition related issues to be addressed by the fresh hiring, reskilling and promotions, though TCS maintained lowest attrition rate in the industry.

* To counter the talent woes, TCS added 1,00,000 freshers in FY22 accounting for 16% of total workforce, which is resulting in pyramid balancing and will provide considerable margin tailwinds in near fiscals. OCF margin is maintained at high teen digits and as internals accruals are sufficient for future business growth requirement, the company also indulges in buy-back of shares. Since 2017, TCS has brought back shares worth Rs660 bn through repurchase agreements which in turn help to improve the return ratios.

* As per the mgmt, achieving planned TCV above $8 bn in coming quarters would not be difficult given the company business restructuring that focuses on greater clients engagements. Driven by strong demand outlook, we expect 12.9% CAGR over FY23-FY24E. EPS is expected to increase to Rs128 by FY24E from Rs104 in FY22E. We assign ‘Buy’ rating to stock with target price of Rs4,245 valuing business at P/E 33xFY24E.

Overhauling organization structure, TCS eyeing at $50 bn revenue

TCS plans to overhaul its organisation structure with the specialized groups aimed to help start-ups as well as global firms as the company eyeing to double its revenue to $50 bn before 2030. The company will create four internal teams include a business transformation group, incubation group, enterprise growth and other aimed at new business models to meet the changing needs of the clients who are focusing on digitising business post pandemic and boom in starts-ups. TCS also planned to open a dozen innovations centres globally including the US and Europe.

Stability in deal wins; mgmt expects strong demand environments

TCS reported a record $11.3 bn of new deals win including two deals worth over $1 bn. It is encouraging to note mega deals wins as the company was struggling to find big deals during some preceding quarters.

Industry led tailwinds to support business

IT services industry has entered into a technology upcycle with businesses turning to cloud services and digital transformation led deals. Digital transformation deals are no longer discretionary as clients continue to spend despite their sector being in economic down-cycle. New areas of spend in sustainability, cloud security, artificial intelligence and machine learning are emerging. Also the talent shortage in the US and Europe is also driving the outsourcing demand for Indian IT services. Industry pricing issue has eased as clients are become less sensitive to pricing and want to invest for improving the topline. Furthermore as cost of living adjustments are incorporated given rising inflation in the US, pricing negotiations in long term contracts will be easier. Given TCS market leadership, project execution capabilities, the company is rightly positioned to leverage the anticipated industry growth.

Stability in deal wins; mgmt expects strong demand environment

TCS reported a record $11.3 bn of new deals win including two deals worth over $1 bn. It is encouraging to note mega deals wins as the company was struggling to find big deals during some preceding quarters. Mgmt expects a strong deal pipeline (small & large) buoyed by robust industry demand. India’s IT services sector has been on a roll, buoyed by the pandemic-induced rush among enterprises to transform into work-from-anywhere, digital businesses, boosting growth and making IT services a ~$227 billion industry by FY22. TCS’s business growth is expected be led by cloud services.

As per mgmt, TCS is also anticipating Horizon 2 opportunities which include AI/analytics and security. Life sciences verticle growth which has been remained muted in past two quarter is likely top pick up as the new deals signed ramp up. The company is also expects slight uptick in pricing while reducing dependence on sub-contractors as attrition rate stabilize gradually will be the key liver for supporting the margin. We view sustained strong deal momentum of over $7-8 bn per quarter, fresh employee addition (net addition of 35,209 employees in Q4FY22 was at highest ever in a quarter) and improving pricing indicates revenue momentum to continue going forward.

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