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Tata Consultancy Services Ltd

Consistent Player amongst large cap it

Tata Consultancy Services (TCS) is a part of the Tata group and India's largest multinational business group. It is an IT services, consulting and business solutions organization that has been partnering with many of the world’s largest businesses in their transformation journeys for over 50 years. TCS offers a consulting-led, cognitive powered, integrated portfolio of business, technology and engineering services and solutions.

Investment Rationale

Steady growth: Amongst the large cap IT pack, TCS topline has been growing at a steady pace of 12.9% CAGR over the last 5 years driven by strong demand for transformation towards digital & cloud technology. Further, in the near term, due to uncertainty around macro environment, client spending is delayed, however FY25 is expected to be robust, driven by strong demand for newer technology such as Gen AI, cyber security, etc. and healthy order pipeline. For margins, EBIT margin stands at 24% for FY23 and 24.3% for Q2FY24 ahead of peers. So, over the next 2 years, we expect topline to grow by 15-16% CAGR and maintain margin between 24-26% led by better topline, improving efficiency and increased utilization.

Opportunity amongst other geographies & verticals: TCS earns 53-55% of revenue from the American region and ~30-33% of revenue from BFSI segment. However, from the past 2-3 quarters, it is witnessing a slowdown because of delays in spending and the banking crisis in the US and on the flip side, we are witnessing steady growth from the European region and segments such as manufacturing, energy and life science. So, going ahead, TCS plan is to focus on opportunity in Europe and Nordic countries as well as segments such as retail, manufacturing, energy where the scope of growth is higher

Moderating attrition & Record order book: TCS order book remains healthy and is one of the highest amongst large cap IT players at USD 34.1 bn in FY23 and has bagged ~USD 21.4Mn in H1FY24. Going ahead, the company’s plan is to convert the current order book to revenue as well as win more deals across geographies & verticals. Besides, its attrition has moderated to 14.9% in Q2FY24 from its peak of 21.5% in Q2FY23 and meanwhile the company strategy is to improve utilization, increase productivity by training employees and providing required skill sets for newer technology.

Outlook & Valution

We believe from a medium to long term perspective factors such as strong demand for newer technology, record order inflows, client willingness to commit for long term deals and investment towards development of technology as well as up skilling of employees will play out. Besides, improving margins and managing cost as well as the company’s focus continues on translating deals to revenue gives us confidence of revival. On the financial front, we have estimated its revenue/EBIT to grow at 16.5/19.8% CAGR over FY23-25E. The stock price has seen decent correction post its Q2FY24 results, thus making its valuation attractive for investment. Thus, we have revised our rating to Buy from Accumulate while maintaining our target price of Rs 4,089.

ITC Ltd.

Steady be for long term

ITC is one of India’s foremost private sector companies and a diversified conglomerate with 12 businesses spanning FMCG, Hotels, Paperboards, Paper & Packaging and Agri Businesses, and operates across all the three sectors of the economy – Agri, Manufacturing and Services. The company’s vibrant portfolio of ~25+ Indian brands across various categories

Investment Rational

Strong emphasis on ITC Next strategy: ITC is currently focusing on building its non-cigarettes portfolio and thus, it has adopted the Next strategy. This strategy is working well for the company and thus it would continue its focus on building a future-ready portfolio with innovating differentiated products, focus on premium & value added products coupled with increasing adoption of digital media and expanding penetration within markets. All these will drive growth for its non-cigarettes portfolio as well as increase share in overall revenue & profits.

Key focus is on driving FMCG segment: Despite challenging environment, ITC’s FMCG segment is growing at a decent pace each quarter and ahead the plan is to continue with consumer centric approach, build future ready portfolio and increase reach via digital technology and invest in brand building via advertisements which will help in fueling brand recall value.

Diversifying to non-cigarettes segments: ITC’s cigarettes segment remained impacted largely because of increase in taxation; however in the last 2 years the growth was led by stability in taxes on cigarettes that aided the recovery in volumes, also focused on premiumization and innovating differentiated variants. In the meantime, ITC planned to diversify from cigarettes and focus on building the portfolio of products amongst segments such as FMCG, Hotels, Agri and Paperboard segments. So, it adopted ITC's next strategy, focused on product mix and distribution reach which aided growth for these segments. Thus, its non-cigarettes revenue/p

Outlook & Valution

ITC will continue its focus on ITC Next strategy which would aid in building future ready portfolio as well as scaling up non-cigarettes business specially FMCG by innovating, renovating and premiumizing products. Besides, the demerging hotel business is moving as per company’s plan which is positive. Overall, the growth prospects remain optimistic and financially we have estimated its Revenue/ PAT to grow at 15%/19.2% CAGR over FY23-25E and assign a Buy rating with a target price of Rs 535.

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