Tough times ahead - Q4FY20 Result Review of Tata Consultancy Services- HDFC Securities

We maintain REDUCE on TCS following a miss on rev and slightly better operating performance. Demand-related factors to worsen while supply constraints are expected to recover ahead. The parallels to GFC are apparent (similar trajectory expected in 1HFY21), although this will be more broadbased. TCS' estimation of recovery in 3Q-4QFY21 is a steep ask in context of 1HFY21 decline, but premised on its order-book and pipeline. Our TP of Rs 1,680, is based on 19x FY22E EPS (~5% cut in EPS est).

Rev at USD 5,444mn, +3% YoY CC has decelerated considerably. Lower than expected 4Q rev was largely due to supply-side factors in BFSI (regulatory & compliance hurdles for transition to remote delivery) accentuating in the last fortnight of 4Q and the vertical contributed ~57% to sequential rev decline. While supply constraints are expected to moderate in 1Q as client approvals for 'secure borderless workforce' delivery (WFH) are obtained, demand-related dents are expected to aggravate. For FY20, TCS' revenue decelerated to 7.1% YoY impacted largely by slowdown in BFSI (5.2% YoY).

Deal bookings were strong (as expected) at USD 8.9bn TCV which included USD 2.4bn from BFSI and USD 3.2bn from Retail & CPG (incl. USD 1.5bn Walgreen Boots deal). BFSI and Regional Markets lagged at -1.3% YoY and - 0.7% YoY respectively. Life-sciences & Healthcare vertical and Communication & Media vertical are expected to outperform other verticals. Within geographies, Europe-led (largely Continental Europe) outperformance continued.

Operating performance was resilient with flat EBIT% at 25.1% impacted by utilisation and lower growth. No slippage in FP-contract and SLAs, attaining >90% WFH for 448k employees engaged in 25,000 live projects, industry leading attrition (12.1%), strong FCF generation are testament to TCS' supreme service delivery/operational capabilities even in period of economic shocks. TCS' digital prowess is reflected in the company delivering 15,000 'Agile' projects for >900 clients in FY20 (TCS has 1,078 >USD 1mn clients).

Valuation and view. We continue to believe that TCS' trinity of growth scale-durability is challenged as risks to large deal ramp-up and cut in discretionary spend have increased. While TCS' supply metrics are resilient, demand dent is overwhelming with a deeper NorthAm/BFS impact and limited exposure to higher velocity verticals. Gains arising out of vendor consolidation/market-share, pipeline conversion and new business opportunities (accelerated cloud migration, remote solution & cyber security) will be offset by cuts to IT budgets, we've factored 6.1/8.5% decline in FY21 Rev/PAT. Valuations at 19.4x FY22E is in-line with its 10-yr avg.

Shares of TATA CONSULTANCY SERVICES LTD. was last trading in BSE at Rs.1715.6 as compared to the previous close of Rs. 1734.45. The total number of shares traded during the day was 240124 in over 19335 trades.

The stock hit an intraday high of Rs. 1762.9 and intraday low of 1677.6. The net turnover during the day was Rs. 413016716.

Source : Equity Bulls

Keywords