Buy Tata Consultancy Services, target Rs 2,400: Sharekhan
Buy Tata Consultancy Services at a price target of Rs 2,400.
The current market price of Tata Consultancy Services is Rs 1,818.
Time period given by the brokerage is one year when Tata Consultancy Services price can reach the defined target.
Investment rationale by the brokerage-
In-line revenue, margins missed the mark: Tata Consultancy Services (TCS) delivered in-line revenue performance during Q3FY2019E, while operating margins missed our estimates. Despite a seasonally weak quarter, TCS delivered constant currency (CC) revenue growth of 1.8 per cent QoQ and 12.1 per cent YoY (highest in the past 14 quarters). The double-digit YoY revenue growth was driven by BFSI (8.6 per cent CC), retail and CPG (10.5 per cent CC), communication and media (10.8 per cent CC) and regional markets (22.6 per cent CC). Digital revenue continued to grow strongly at 52.7 per cent YoY. On a reported basis, USD revenue increased by 0.7 per cent QoQ to $5,250 million, below our estimates, owing to higher-than-expected 110 BPS QoQ cross-currency headwinds. EBIT margin declined by 90 BPS QoQ to 25.6 per cent (below our estimates), owing to increased cost of doing business (subcontractor cost increased by 60 BPS QoQ), employee expenses (net addition of 6,827 employees during the quarter) and currency headwinds (50 BPS QoQ). Lower profitability was offset by higher-than-expected other income (93.4 per cent QoQ), which resulted in 2.6 per cent QoQ growth in net profit during the quarter.
Digital growth acceleration continues, growth accelerated in key markets and verticals: Digital revenue growth remained strong at 52.7 per cent YoY in Q3FY2019 compared to 60 per cent YoY in Q1FY2019. Digital business contributed 31 per cent to the total revenue (vs. 28 per cent in Q2FY2019) in Q3FY2019. However, revenue from the core business declined by 2.3 per cent QoQ in Q3FY2019. Region wise, U.K. and continental Europe led the revenue growth in Q3FY2019, with CC revenue growth of 25.1 per cent YoY and 17.6 per cent YoY, respectively. APAC growth was at 12.6 per cent YoY on CC terms during the quarter. North America grew by 8.2 per cent YoY on CC terms on account of strong growth in BFSI. BFSI CC revenue growth accelerated to 8.6 per cent YoY (versus 6.1 per cent YoY and 4.1 per cent YoY in Q2FY2019 and Q1FY2019, respectively) on account of strong growth from North America and insurance. Retail and CPG, energy and utilities (18.1 per cent YoY CC) and life sciences and healthcare (15.7 per cent YoY CC) continued to drive revenue growth during the quarter. Communication and media CC revenue growth bounced back to 10.8 per cent YoY. Client addition metrics remained solid, with addition of one new client in $100 million+ revenue bracket during the quarter. Net headcount addition was 27,049 on a YoY basis to meet the increasing demand, while the attrition rate remained at 11.2 per cent LTM (industry-leading retention).
Demand commentary remains strong: Management remains confident of delivering double-digit revenue growth in FY2019 on account of strong revenue growth in 9MFY2019, increasing IT spending in BFSI, retail along with markets such as Europe and robust deal wins in Q3FY2019. Total contract value (TCVs) of large deals increased by 20.4 per cent QoQ to $5.9 billion during the quarter. Strong execution capability along with strong deal closures in CY2018 and healthy deal pipeline would help TCS to maintain the revenue growth momentum in the medium term. Further, management highlighted that major verticals (except technology, manufacturing and communication) that constitute 70-80 per cent of total revenue are in a strong growth trajectory. TCS sees huge opportunity in the BFSI vertical especially in North America and Europe in areas of cloud migration, micro services, payments, trading platforms and blockchain technologies. As spending is moving away from front-end to back-end, TCS expects a good demand environment in the retail vertical to continue going forward (though certain blips may happen owing to increasing bankruptcies in the U.S.). However, there would be pressure on margins across the industry owing to increased cost of doing business because of talent crunch and higher local hiring. We believe it would be transient in nature for TCS as it would rationalise the cost structure in the medium term given its execution capability and ability in taking price hike.
Maintain Buy with a target price of Rs 2,400: We have fine-tuned our earnings estimates for FY2019E/FY2020E/FY20121E on account of margin miss during the quarter. However, we remain positive on the revenue growth momentum of TCS in FY2020E, given acceleration in deal wins with increasing TCVs (driven by BFSI deal wins), strong digital growth (>50 per cent YoY in the past two quarters) and acceleration in BFSI (management cited double-digit exit growth rate). At the CMP, the stock is trading at 20x its FY2020E EPS, which commands an industry-leading PE multiple, given its superior digital execution capabilities and increasing market share among large peeRs Therefore, we maintain our Buy rating on the stock with a price target of Rs 2,400.