Buy TCS; target of Rs 4250: Motilal Oswal

Motilal Oswal's research report on TCS

TCS reported 3QFY22 revenue of USD6.52b, up 4.0% QoQ in constant currency (CC) – above our estimate of 3.2% QoQ growth. 3Q topline was driven by Communication, Technology and Regional markets, while Manufacturing and Retail verticals dragged down growth. EBIT margin contracted 60bp QoQ to 25.0%, 100bp lower than our estimate of 26.0%, as TCS augmented its employee intake (all-time high at 28k), along with a spike in sub-contracting cost. Net profit stood at INR97.7b, up 1.5% QoQ, which was below our estimate due to the miss on operating margin. TCS’s 3Q deal wins remained stable at USD7.6b, with no mega deal (similar to 2Q). We view the stability in deal wins in the absence of mega deals as positive. This also implies a higher annual contract value (ACV) that should support near-term growth. We are encouraged by the company’s robust topline growth in a seasonally weaker quarter. We expect this performance to alleviate the concerns on its growth potential and the likely drag from growing share of smaller deals in the market. Management commentary on demand environment continues to remain strong, with a high visibility on Cloud-led spending over the next 2-3 years. We are factoring in FY23E revenue growth of 15% YoY in CC.

Outlook

We maintain our positive stance on TCS, given its strong growth outlook. Our TP of INR4,250 implies 30x FY24E EPS, with a 10% upside potential. Maintain BUY.