Accumulate Tata Consultancy Services; target of Rs 4256: KR Choksey

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KR Choksey's research report on Tata Consultancy Services

Tata Consultancy Services Ltd (TCS) Q2FY22 performance was slightly lower than with our estimate. Dollar Revenue was up 2.9% QoQ and in CC term grew by 15.5% YoY to USD 6,333mn (KRChoksey est. USD6,379mn). Rupee revenue grew by 2.9% QoQ to INR 4,68,670mn (KRChoksey est. INR 4,72,545Mn). Reported operating margin witnessed a meagre growth, up by 8bps to 25.6% QoQ backed by healthy deal wins (book-to-bill ratio is 1.2x similar to it’s global peers). Reported Net profit grew by ~6.8% QoQ to INR 96,230mn (KRChoksey est. INR 95,536mn) with margin of 20.5% (up 69bps on QoQ basis) mainly due to higher net other income. TCS showed strength in its core business segment and has bagged higher mid-sized deals spread across verticals. Digital adoption, Agile, automation and cloud have multiyear tailwind and we expect the growth to continue on the back of strong demand environment to cloud shift, BFSI helped to pick up growth momentum in Europe, continued strong deal wins in Retail & CPG vertical and recent recovery in Manufacturing vertical. TCV grew by +25% YoY led by TCS CogniX excluding the mega deals. We expect to see the supply crunch (to stay in the near term yet industry best) along with discretionary spend will limit the margin expansion despite better operating leverage and higher pricing. The company declared a dividend of INR 7 per share. Our target price of INR 4,256 is based on 32x Mar-24E EPS with EPS CAGR of 13.7% over FY22-24E.

Outlook

TCS is currently trading at a valuation with a P/E multiple of 32.7x/29.1x on FY23E/FY24E earnings. We expect strong deal momentum across verticals, ease in travel restrictions and continued investments in newer technologies such as product & platform which will help maintain the growth momentum in medium term future and hence we are assigning a P/E multiple of 32x to the FY24 estimated EPS of INR 135 to arrive at a target price of INR 4,256 per share (earlier target of INR 4,053), an upside of 8% over the CMP. Accordingly, we reiterate an “ACCUMULATE” rating to the stock.

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