Hold Tata Consultancy Services; target of Rs 2116: Prabhudas Lilladher

Prabhudas Lilladher's research report on Tata Consultancy Services

TCS reported sharper than revenue decline of 6.7% QoQ CC (Ple:5.3%; Cons:5.2%) & 7.1% QoQ in reported terms (Ple: 6%, Cons: 5.5%). Supply side impact was just 1.2% QoQ (20%) hence the entire revenue decline was demand led. Revenue growth was mainly impacted by Retail (-16% QoQ), Manufacturing (-11% QoQ) & Regional markets (-11.2% QoQ), surprisingly BFSI de-growth was curtailed just at 2.1% QoQ (all in reported terms). EBIT margin decline was below our/street estimates at 23.6% (Ple: 24%, Cons: 24.2%) which was mainly led by increase in employee costs by 360bps (45.3% of revenues, average 41% of revenues). While TCS will see declining FY21 earnings growth due to COVID-19 led business disruption, we expect it to bounce back to sustained double-digit growth from FY22 as it resumes market share gains. We have increased our EPS estimates of FY22/23E led by revenue upgrade of ~2.5% led by pent up demand.

Outlook

We have estimated 6% revenue decline in FY21E & 9.6% growth in FY22E. We value TCS on 21X (earlier 20X, increased due to market share gains) Sep-22 EPS of Rs. 100 & arrive at a changed target price of Rs.2116 (earlier: Rs.1982). TCS is currently trading at 22.X/20.9X earnings multiple at EPS of Rs.97.2/104.3X on FY22E/FY23E respectively. Maintain HOLD.

Tata Consultancy Services 18072020-prabhu