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Downgrade cycle ahead?

Reported growth and margins were in-line with our / consensus estimates. As we reach the fag end of the recovery leg, organic growth (2.6% QoQ, CC, our estimate) reverted more or less towards pre-Covid baseline levels for March quarter. This corroborates our argument that industry growth is unlikely to witness a meaningful acceleration (vs pre-Covid) over medium term as is expected by the street. On expected lines, deal win TCV (US$9.2bn) remained healthy and the management reiterated double-digit growth outlook for FY22. Given the good pace of vaccination in core markets like US / UK, potential resumption of costs related to marketing events / onsite travel (in H2FY22) is a key thing to watch out for. As we rebase our exchange rate estimates (now INR / US$ = 75 / 76 for FY22 / FY23E), FY22E EPS witnesses ~5% upgrade even as FY23E EPS remains largely stable. We downgrade the stock to HOLD (from ADD earlier) with an unchanged TP of Rs3,350 (implying 30x FY23E EPS). Tactically, in the context of 2nd wave in India, TCS should command relative investor interest given (1) low / no disruption to IT and (2) perception of the stock as a cash proxy during heavy market volatility.

* In-line revenue growth and margins. Revenue growth of 4.2% QoQ (CC) is in-line with expectations. Of this, we estimate ~1.6% contribution from captive takeover deals which ramped up during this quarter. It should be noted that organic revenue growth of 2.6% QoQ (CC, our estimate) was more or less in-line with pre-Covid growth rates for March quarter. Outside BFSI (includes inorganic), verticals like retail (+4% QoQ, CC), manufacturing (+3.9% QoQ, CC) and Healthcare (+3.8% QoQ, CC) have delivered good sequential growth. While the former two were aided by a low base, healthcare vertical continued its strong performance throughout the year. EBIT margins expanded ~20bps QoQ, in-line with expectations. Utilisation dip on account of strong headcount addition, lower margin revenue from acquired captives and strong increase in other expenses seem to be the key margin headwinds. Continued restrictions on travel and offshorisation could have been the key tailwinds.

* Sharp INR depreciation to cushion near-term margin headwinds. On expected lines, deal win TCV (US$9.2n) remained healthy and the management reiterated double-digit growth outlook for FY22. Given the good pace of vaccination in core markets like US / UK, potential resumption of costs related to marketing events / onsite travel (in H2FY22) is a key thing to watch out for. As we rebase our exchange rate estimates (now INR / US$ = 75 / 76 for FY22 / FY23E), FY22E EPS witnesses ~5% upgrade even as FY23E EPS remains largely stable. We downgrade the stock to HOLD (from ADD earlier) with an unchanged TP of Rs3,350 (implying 30x FY23E EPS).

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