Buy Tata Consultancy Services; target of Rs 4468: Prabhudas Lilladher

Prabhudas Lilladher's research report on Tata Consultancy Services

TCS reported beat in revenue with growth of +3% QoQ USD (Ple:2.5%, Cons: 2.1%). Growth was broad-based led Retail and CPG (+3.7% QoQ USD), Communications & Media (+3% QoQ USD), Manufacturing (+3% QoQ USD). Deal TCV was healthy at USD $7.6bn, flat QoQ, +12% YoY. This includes strong deal win of $2.9 Bn in BFSI, $1 Bn in Retail and $4.5 Bn in North America. Deal pipeline continues to be strong with good mix of large, mid-sized and small deals. Several new deal wins were driven by TCS’s innovative products and platforms. TCS experienced improved realization this quarter and there is further scope for price increase. EBIT margin at 25% (-57bps QoQ) was lower than our (26%) & cons (25.6%) estimate. Margin decline was led by supply side pressures of backfilling of attrition, increased sub-contracting costs, wage interventions to retain talent and discretionary costs. These were offset partially by tailwinds from pyramid balancing, improved utilization, slight uptick in realization.

Outlook

We increase our EPS estimates by ~1.6%/2.0% for FY23/24 led by marginal increase in revenue growth and EBIT margin. We project revenue growth of 16.3%/14%/11.4% in $ terms for FY22/23/24E respectively. We arrive at a DCF based TP of INR 4,468 (implied earnings target multiple of 32x on FY24 EPS). TCS is currently trading at 31/27.7 on FY23/24 EPS of 124.7/139.5 with revenue/EPS CAGR of 12.7%/16.5% over FY22-24E.