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Growth momentum sustained; Outlook intact

Tata Consultancy Services, a division of Tata Sons Limited, is a global IT services organization that provides a comprehensive range of IT services to its clients in industries. The Company caters to finance and banking, insurance, telecommunication, and transportation among others.

* Q3FY22 revenue up 16.4% YoY (+4.3% QoQ, +15.4% YoY on constant currency (CC) basis) as segments continued to record strong growth.

* EBIT margin recorded a 60bps sequential contraction to 25.0% owing to increase in backfilling costs, targeted increments and subcontractor expenses. PAT however surged 12.3% YoY on higher other income.

* Company added 28,238 new employees during Q3FY22 bringing the total headcount to 556,986. Attrition in the quarter stood at 15.3%.

* Company managed to sustain its strong growth momentum, recording robust performance across all verticals, with pace expected to continue in the coming quarters. We reiterate our BUY rating on the stock with a rolled forward target price of Rs. 4,457 based on 33x FY24E adj. EPS.

Spike in revenue backed by solid growth across verticals

During Q3FY22, revenue grew 16.4% YoY to Rs. 48,885cr (+4.3% QoQ,) due to increase in volume across all the major segments. BFSI segment (accounting for 38.9% of total revenue) recorded 14.1% YoY growth to Rs. 18,998cr (+3.0% QoQ), supported by strong TCV of USD 2.9bn. Retail and Consumer Packed Food segment (CPG) revenue increased 20% YoY to Rs. 7,852cr (+4.9% QoQ), while Communications, Media and Technology Services business saw growth of 18.3% YoY to Rs. 8,254cr (+6.7% QoQ). Manufacturing segment rose 17.3% YoY to Rs. 4,722cr (+4.0% QoQ), and Life Sciences and Healthcare revenue soared 18.5% YoY to Rs. 5,169cr. Group EBIT grew 9.4% YoY to Rs. 12,237cr, however EBIT margin shrank to 25% vs. 26.6% in Q3FY21, impacted by higher backfilling costs in addition to target increments and higher subcontractor expenses. PAT came in at Rs. 9,769cr (+12.3% YoY), aided by higher other income (+74.4% YoY) despite higher finance costs (+37.2% YoY).

Key concall highlights

* During Q3FY22, TCV stood at USD 7.6bn. Company’s total count of clients in the $100mn+ band grew to 58, and $50mn+ to 118.

* TCS BaNCS added 9 new wins and 5 go lives, while Ignio signed up 10 new customers, of which 5 went live. Quartz blockchain platform saw 3 new wins.

* Company board proposed an interim dividend of Rs. 7 for the quarter, taking the total dividend for FY22 to Rs. 21 so far.

Company announces share buyback

On the back of strong performance, the Board on January 12, 2022 approved a proposal to buy back up to 4cr equity shares of the company for an amount not exceeding Rs. 18,000cr. Priced at Rs. 4,500 per equity share, implying a nearly 13% upside over CMP, the buyback would amount to 1.08% of TCS’ total paid-up equity capital.

Valuation

Sustained traction in new deal wins and gradual pickup in economic outlook will continue to translate to higher performance for TCS in the near-to-medium term. Company already reached its earlier H2FY22 headcount goal of 34,000 new hires in the current quarter and is looking to hire more in Q4FY22. Maintaining a positive outlook, we retain our BUY rating on the stock with a rolled forward target price of Rs. 4,457 based on 33x FY24E adj. EPS.

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