Accumulate TCS; target of Rs 2600: Prabhudas Lilladher

TCS delivered a steady set of results for Q3FY17 with USD revenues and PAT beating our expectations. Growth beat in Q3 was driven by traction in emerging markets (Latin America and India). Notably, Equipment and software sales aided most of the incremental revenue growth for the quarter. BFSI vertical (40.4% of total revenues) which was an area of concern in 1H has delivered a steady growth of 2.1% cc in 3QFY17 and offers comfort. TCS announced that Mr Chandra would step down as the CEO of TCS effective Feb 21, 2017 to take over a new role as the Chairman of Tata Sons. Mr Rajesh Gopinath (current CFO) has been named the CEO designate.

Post building Q3 financials, we expect TCS to deliver 6.5% USD revenue growth for FY17E (v/s 7.1/15/16.2% USD revenue growth delivered in FY16/FY15/FY14). Crosscurrency woes are hurting the reported USD revenues by a wide margin for the second consecutive year in row. TCS retained its EBIT margin guidance at 26‐28% despite scope for increased regulatory challenges over the coming period. We model TCS to deliver 6.5/9.5% USD revenue growth for FY17/FY18E. Our EPS estimates are retained at Rs 145/158/sh. Comforting growth outlook and moderate valuations (16x FY18E EPS) leads us to retain “Accumulate” stance (17x Sep18E EPS).