Hold Tata Consultancy Services; target of Rs 2106: Prabhudas Lilladher

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Prabhudas Lilladher's research report on Tata Consultancy Services

TCS revenue growth continued to get dragged on account of headwinds in major segments like BFSI & Retail & US geography. TCS posted a weak 0.3% QoQ CC growth lower than our & street estimates of 0.9% QoQ CC. However, TCS positively surprised street in margins, increasing 100bps due to operational efficiency & currency tailwinds at 25%(Ple:24.9%, Cons:24.5%) in Q3FY20. Decrease in headcount (-4,063 employees QoQ) might have led to increase in utilization rates. The company stopped sharing digital revenues from the quarter. BFSI & Retail contributes to 46% of the total revenues and are showing signs of weakness. TCS expects potentially weak demand trend to continue in Q4FY20E also. Management mentioned that challenges faced in BFSI vertical are primarily from select large banks in US & UK in traditional business.

Outlook

TCS is a fundamentally superior stock, but expensive valuations with moderating growth restrict us to stick with our HOLD rating. We expect TCS to deliver 7.5% revenue CAGR & EPS CAGR of 8.2% over FY20E-22E. We maintain our estimates & arrive at target price of Rs. 2106(earlier Rs.2102) (valued at 21.5x) Sep-21 earnings. TCS is currently trading at 21.9x/20.2x at FY21E/22E multiple.

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