Hold Tata Consultancy Services; target of Rs 2315: Edelweiss
Edelweiss recommended hold rating on Tata Consultancy Services with a target price of Rs 2315 in its research report dated October 12, 2017.
Edelweiss' research report on Tata Consultancy Services
Tata Consultancy Services’ (TCS) Q2FY18 revenue, at USD4,739mn, rose 3.2% QoQ versus Street’s 3.8% estimate. However, EBIT margin jumped 170bps QoQ to 25.1% versus 24.7% estimate. The margin beat was on account of favourable cross currency movement and operational efficiencies. Key highlights: 1) retail deal pipeline has improved, indicating turnaround in this business; 2) BFSI pipeline is improving, but not enough to call out a turnaround; and 3) robust 5.9% QoQ spurt in digital (contributes 19.7% to revenue) with expanding deal size and customers preferring large players over small vendors. We maintain that limited margin levers will impinge on TCS’ earnings growth. Maintain ‘HOLD’ with TP of INR2,315 (16x FY19EPS).
TCS reported better-than-expected earnings in Q2FY18 and outlook commentary was also slightly better (even for Japan and Diligenta), although it lacked clarity on large segments like BFSI and retail. We maintain our thesis that TCS has sweated its margin levers to the fullest, leaving limited scope for higher earnings growth (FY18E PAT growth < revenue growth), implying fair valuation of 17.6x FY19E EPS at CMP. We believe, TCS is a dividend/buyback play till margin uptick/high growth starts. We maintain ‘HOLD/SP’ with TP of INR2,315 (16x FY19E EPS).
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