Accumulate TCS; target of Rs 2570: KR Choksey

KR Choksey's research report on TCS

Q2FY17 revenue grew by 1% in cc terms while US Dollar revenue grew by a mere 0.3% largely due to slowdown in Retail & CPG vertical which reported a de-growth of 3.1% qoq. De-growth in Retail & CPG translated into slower growth in Digital Revenues of 1.5% qoq, now contributing 16.1% of total revenues vs. 15.9% in Q1FY17. BFSI performance (1.2% growth qoq) reflected cautious client spending in the macro environment. Q2 witnessed soft volumes growth of 1.3% qoq while pricing continued to pressurize top-line growth. Operating margins at 26% improved 94 bps qoq and 106 bps above our estimate on higher operational efficiency as cost of revenues (COR) declined 1.7% qoq and SG&A expenses declined 0.4% qoq. Higher operational efficiency managed to tackle headwinds from GBP depreciation and INR appreciation.

Although operational efficiency and the improved margins therein brought cheer to Q2 results, revenue growth instills caution in our outlook. Lack of structural improvement in pricing also limits our capacity to re-rate the stock. We will continue to monitor the environment post Brexit and events such as US elections. We have an “ACCUMULATE” rating on the stock as we assign a multiple of 15x to its FY18E EPS of INR. 162 to arrive at a price target of INR 2,570.