Buy Tata Consultancy Services target of Rs 4113: Prabhudas Lilladher

HDFC Securities research report's outlook and valuations:  "The YTD EPS upgrades (consensus) have been led by mid-tiers such as Tata Elxis, Mindtree, Mastek, and Persistent Systems, ranging from 20-40 percent and, within tier 1, by Wipro (~15%). We expect the sector (coverage universe) to post 13 percent and 14.5 percent USD revenue/APAT CAGR over FY21-24E compared to 6.5/7.5 percent over the past five years. The mid-tier valuation premium relative to tier 1s may sustain, based on its relative outperformance (>500bps growth outperformance over FY21-24E as compared to 250bps earlier). We roll over valuations to Sepemtember-23E and increase target multiples for most of the companies in our coverage universe. We remain broadly constructive across the sector and ahead of consensus on growth/EPS; our preferred picks are Infosys, HCLT, Mphasis and Zensar."

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Prabhudas Lilladher's research report on Tata Consultancy Services

Revenue grew by +4% QoQ CC lower than our (5.5%) & cons estimates (4.5%) led by softness in Life Sciences & Healthcare (0.9% QoQ USD) led by closure of contracts in European region (-0.2% QoQ USD). Growth was strong in other verticals & geos, recovery in India business was strong (+14.1% QoQ USD). Deal TCV of USD $7.6bn was lower on QoQ and YoY basis (vs $8.1 Bn in 1QFY22 and $8.6 Bn in 2QFY21). But TCV continues to be healthy with growth of 25% YoY excluding the mega deal of $2.5 Bn won in 2Q21. Deal TCV is heterogeneous mix of all type of deals from small to large size and several new deal wins were driven by TCS’s innovative products and platforms. Margins at 25.6% (+10bps QoQ) were slightly lower than our & cons estimate of 25.8%. However, margin performance was resilient given currency headwinds (10bps impact) and higher hiring costs to backfill attrition (LTM attrition at 11.9%, +330 bps QoQ). We believe Q2, Q3 are peak quarters for margin pressure across pack & margins will normalize aggressively from Q4 onwards as freshers will come on-board.

Outlook

Due to miss on revenues, our EPS cut stands for ~1.4% for FY22, estimates largely remain intact for FY23/24. We project revenue growth of 16%/13.7% $ terms for FY22/23E respectively. We arrive at a DCF based TP of INR 4113 (earlier: 3968). TCS is currently trading at 32.1/28.8 on FY23/24 EPS of 122.6/136.6 with revenue/EPS CAGR of 13.7%/15.7% over FY21-24E.

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