Buy TCS; target of Rs 4250: Motilal Oswal

Motilal Oswal's research report on TCS

TCS reported revenue of USD7.28b in 3QFY24, up 1.0% QoQ in constant currency (CC) terms and 140bp above our estimates despite a weak demand environment and seasonal weakness. The growth was aided by strong India performance (up 26% QoQ, partially aided by BSNL deal execution). TCS reported deal wins of USD8.1b (down 28% QoQ but up 3% YoY, book-to-bill ratio at 1.1x), in line with our expectations. EBIT improved 70bp QoQ to 25.0%, 50bp ahead of our estimates, aided by lower subcontracting costs and cost savings, which more than compensated for adverse seasonality. 3Q headcount declined 5.7k (-1% QoQ). Attrition (LTM) declined by 160bp QoQ to 13.3%. TCS expects attrition to continue to soften in the near term. Reported PAT was negatively impacted by a onetime cost of USD115m associated with legal payout to Epic System.

Outlook

We have kept our FY24 EPS estimate unchanged but have raised FY25-FY26 EPS estimates by ~2.0%. Over FY23-26E, we expect a USD revenue CAGR of ~9% and an INR EPS CAGR of ~14%. Our TP of INR4,250 implies 25x FY26E EPS, with a 14% upside potential. We reiterate our BUY rating on the stock.