Prabhudas Lilladher recommended hold rating on Tata Consultancy Services with a target price of Rs 1985 in its research report dated October 11, 2019.
Prabhudas Lilladher's research report on Tata Consultancy Services
TCS posted a second consecutive quarter miss on revenues & margins which puts them in a tough spot for FY20E and confirms single digit growth in FY20E. TCS posted a muted revenue growth of 0.6% QoQ USD, 1.5% QoQ CC (Ple:2.5%:3.2%, Cons:1.9%:2.6%) with weak margin performance at 24%(Ple:25.6%, Cons:25.3%). BFSI & Retail contributes to 46% of the total revenues and are showing signs of weakness. We believe manufacturing (10% of total revs) weakness is yet to be seen as globally all the manufacturing PMI's are lowest in last 10 years. (The U.S. manufacturing PMI came in at 47.8% in Sept, the lowest since June 2009.) Digital growth slowed down in Q2FY20 to just 3.7% QoQ compared to average 8.8% QoQ in last 4 quarters. Despite of strong order booking of US$6.4bn, TCS management remained pessimistic about growth revival in 2HFY20. We note that 2H is usually seasonally weak for TCS (2HFY19 average growth:1.7%) owing to lower number of working days, macro uncertainty and we expect no difference in this trend in FY20E.
We incorporate FY22E estimates & value TCS based on Sep-21(Rs.92.3) earnings with changed target price at Rs.1985(earlier: Rs. 2273; multiple: 21.5x Sep-21 vs earlier 22.5x Mar-21). Stock is currently trading at 23.1x/ 20.5x/19X FY20E/21E/22E earnings.
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