Neutral Tata Consultancy Services; target of Rs 3175: Motilal Oswal

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26 Aug, 2025 12:21

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Motilal Oswal's research report on Tata Consultancy Services

Tata Consultancy Services (TCS) reported revenue growth of 4.1% QoQ CC in 3Q (v/s est. 2.3% QoQ CC). This is the best QoQ growth posted by the company since FY11 in a seasonally weak 3Q – it was led by broad-based delivery across sectors and regions. Moreover, TCS improved its EBIT margin to 26.6% (+40bp QoQ; +100bp v/s our estimate) despite absorbing the full impact of a wage hike (160bps impact). Deal wins (ex-Postbank at ~USD0.5b) were USD6.8b, down QoQ on tough comps, but were up 13% from Q3 FY20. - TCS reported OCF/PAT of 137% and FCF/PAT of 122%, boasting a strong performance on working capital. It exited Q3 with cash of INR654bn. - This strong 3Q growth in TCS, in our opinion, indicates both a strong tech spending environment and the ability to capture an outsized share of cloud migration spend. In our view, the TCS management’s strong commentary on enterprise demand, especially on cloud, implies a positive outlook for peers as well. TCS also highlighted conversion of large deal pipeline to orders in 3Q, which we expect would be echoed across the sector in 3Q. - We expect TCS to be relatively better positioned (v/s the sector) to leverage the large deals coming into the market. Backed by strong deal wins in 9MFY21 and continued momentum in cloud and data deals, we expect TCS to deliver a ~16% USD growth CAGR over FY21–23E - We upgrade our EPS estimates by 3–6% for FY21/FY22/FY23E, primarily led by revenue/margin beat during the quarter. While we continue to be positive on the company, we remain Neutral given the elevated multiples. The stock currently trades at ~25x FY23E EPS.

Outlook

We increase our EPS estimate for FY21/FY22/FY23E by 3%/4%/6% on account of a strong beat in 3Q. - Our TP implies 25x FY23E EPS on our revised estimates. - While we remain positive on the company, we remain Neutral given the rich multiples.

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