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Hold Tata Consultancy Services Ltd For Target Rs.3,500

Revenues miss; deal intake remains solid

* Revenue growth missed expectations due to a sharp decline in the India business (-14.1% QoQ due to the second Covid wave). Revenue grew 2.4% QoQ in CC terms in Q1 (exregional markets, grew 4.1%). EBITM declined 130bps QoQ to 25.5% due to salary hike.

* Revenue growth was broad-based, driven by Life Sciences & Healthcare (7.3% QoQ CC), Technology & Services (5.0%), Manufacturing (4.8%), Retail & CPG (4.4%) and BFSI (3.1%). All geographies, except for India, posted sequential growth.

* Management remains confident about the revenue growth trajectory in FY22 on broadbased demand, strong deal intake (USD8.1bn in Q1; 17% YoY), healthy deal pipeline, and traction in cloud, cyber security, analytics and enterprise application services.

* We lower our FY22/23/24 EPS estimates by 1.3%/0.1%/0.1%, after factoring in Q1FY22 revenue miss. TCS is well-positioned to benefit from the strong demand environment, acceleration in cloud adoption and digital transformation opportunities. However, revenue miss and rich valuations will weigh on stock performance. Maintain Hold with a TP of Rs3,500 (28x Jun’23E EPS).

What we liked? Robust deal intake (USD8.1bn), broad-based revenue growth, good management of attrition (LTM attrition inched up to 8.6% in Q1 but is well under control).

What we did not like? Decline in India, growth moderation in Continental Europe and APAC. Revenues miss estimates due to drag in India business: Q1FY22 revenues grew 2.4% QoQ CC and came in below estimates due to the decline in India (-14.1%) on account of the second Covid wave.

Revenue growth (excluding Regional markets & Others) was healthy at 4.1% QoQ CC. Overall volume growth for the quarter stood at 4.4% QoQ. TCS continues to see strong demand in growth and transformational services as customers undergo transformational journeys to thrive in the new normal. The company has signed deals worth USD8.1bn in Q1, with a book-to-bill ratio of 1.3x. Management indicated that deal intake remains well-balanced across deal sizes in Q1, with the largest deal being ~USD0.4bn. It added 20,409 employees in Q1, the highest-ever addition in a quarter. Management remains confident of delivering double-digit revenue growth in FY22 on healthy deal wins/deal pipeline and broad-based growth momentum. The pricing environment remains stable as well.

EBITM declined 130bps sequentially; adjusted EBITM to be resilient in FY22: EBITM declined 130bps QoQ to 25.5% due to salary hike (-170bps), partly negated by the weak rupee (+30bps). Management expects discretionary expenses to return to pre-pandemic levels by FY22-end. EBITM should recover in the coming quarters, with the normalization of salary hikes and revenue growth recovery. This should drive steady adjusted EBITM YoY in FY22.

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