TCS - 3QFY17 Result Update - REDUCE - Good Quarter, but Top-level Rejig a Headwind - Reliance Securities

Tata Consultancy Services (TCS) has delivered decent performance in a seasonally weak quarter with its USD revenue growing by 0.3% qoq (2% qoq in CC terms) in 3QFY17, which has topped our estimate by 0.3%. EBIT margin remained flat (albeit 30bps above our estimate), while net profit rose 2.9% qoq (4.9% above our estimate). However, we envisage the appointment of N Chandrasekaran as Chairman of Tata Sons - following the ouster of Cyrus Mistry in Oct'16 - as a key challenge for TCS now. Mr. Rajesh Gopinathan, CFO, has been elevated as CEO& MD, while Mr. NG Subramaniam, President of Financial Services, has been appointed President & COO. We believe in a time marked with multiple challenges and key headwinds impacting the IT sector, this is not an apt moment to rock the boat for TCS, especially considering Mr. Chandrasekaran's vast expertise and CEO and Board-level connect with major clients. Though we realise this is a strategic decision taken with a view to stabilising the turbulent waters at Group level, we remain concerned about the consequential impact on TCS.

CC Revenue Growth Decent, but not Broad-based

TCS' revenue rose by 0.3% QoQ in USD terms (2% in CC terms). Volume witnessed 1% qoq growth; in yoy terms it grew by 9.2%, marking the second successive quarter of single-digit growth. Reported pricing declined 0.7% qoq, while yoy pricing declined for the 9th successive quarter, reflecting pricing pressure, mainly in commoditised services amidst a highly competitive environment.

Vertical-wise, TCS' key verticals - which account for >84% of revenue - BFSI (+0.5% qoq), Retail (flat), Manufacturing (-0.6% qoq) & Communications (-4.1%) were growth-challenged, which implies that growth has not been broad-based. Service line-wise, Infrastructure Services (+7.3% qoq), Asset-Leveraged Solutions (+15.7%) and Engineering & Industrial Services (+2.4%) grew at a decent pace. Geographic-wise, Latin America, India and Middle East & Africa witnessed 10.3%, 8.9% & 4.5% sequential growth, respectively.

Outlook & Valuation

Post 3QFY17 performance, we marginally revise EPS estimates upwards by 1% for FY17E & FY18E. Given single-digit EPS growth, we believe valuations at 16.1x FY18E EPS are expensive. Besides, a top-level rejig especially when the IT sector is embroiled with multiple headwinds is not an ideal development for TCS, in our view. We reiterate our REDUCE recommendation on the stock with a Target Price of Rs2,200.

Shares of TATA CONSULTANCY SERVICES LTD. was last trading in BSE at Rs.2258.55 as compared to the previous close of Rs. 2252. The total number of shares traded during the day was 144740 in over 5667 trades.

The stock hit an intraday high of Rs. 2273.9 and intraday low of 2230. The net turnover during the day was Rs. 326822191.

Source : Equity Bulls

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