Hold Tata Consultancy Services; target of Rs 2315: Edelweiss

Edelweiss' research report on Tata Consultancy Services

Key highlights of our recent interaction with Tata Consultancy Services’  (TCS) management are: 1) sustained so ftness in BFSI and retail stemming  from lower discretionary spending by large banks and online transition by  large retailers, respectively; and 2) strong growth in rest of business  (RoB) spearheaded by broad-based spending. We believe, given substantial contribution of BFSI and retail segments (32.9% & 12.2%) to TCS’ revenue, overall growth in Q2 FY18 is likely to remain subdued.  Moreover, by virtue of traditionally being a first half revenue-driven company, overall FY18 growth too is likely to be muted. The anticipated soft revenue coupled with INR strengthening is likely to lead to muted earnings growth in spite of strong execution and offerings. Maintain ‘HOLD’ with TP of INR 2,315.

Outlook
Key segments tepid; maintain ‘HOLD’  The absence of pick up in spending in BFSI is surprising given the rise in interest rates in  the North American market and improving profits, particularly in the BFSI space. Stagnant new spends imply further delay in decision making and awarding of new deals. We believe, this coupled with continued pain in retail (although temporary) implies lower growth for the sector and in particular for TCS, Infosys and Wipro, which draw substantial portion of revenue from these segments. We will keenly monitor quarterly earnings & commentary and maintain that TCS is a dividend play until margin stabilises and demand environment improves in spite of its best-in-class execution. We maintain ‘HOLD/SP’ with target price of INR 2,315 (16x FY19E EPS). The stock is currently trading at 18.7x and 17.3x FY18E and FY19E EPS, respectively. For all recommendations report, click here

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