Maintain ADD on TCS - Stellar performance in Q2FY21 - HDFC Securities

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities & Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities

We maintain ADD on TCS, following a stellar 2Q performance and a strong commentary. Key positives included the following: (1) strong deal wins (including Phoenix), supported by market share gains, vendor consolidation with a high number of small and mid-sized deals enabling faster transition) and a balanced deal pipeline; (2) broad-based growth across core verticals (BFSI, Retail & CPG rebound) and core geographies (UK to be volatile); (3) resumption of hiring momentum with 12,000 fresher on-boarding planned in 3Q (7,000 in 1Q) and wage increase, (4) operational resilience reflected in higher utilisation, lower attrition, lowest-ever DSO (including unbilled) leading to strong FCF generation-linked to better payout (Rs 160bn buyback announced). Our target price of Rs 3,070 is based on 27x Sep-22E EPS (24x earlier) with EPS CAGR at 16% over FY21-23E.

2QFY21 highlights: (1) Revenue came at a 25-quarter high growth of 4.8% QoQ CC (-3.2% YoY). (2) EBIT margin hit an 8-quarter high at 26.2%, +259bps QoQ supported by higher gross margin (+150bps QoQ) on operating leverage and lower sub-contracting (+40bps QoQ impact). (3) Strong supply-related metrics such as uptick in re-skilling (29% QoQ in learning hours) and reduction in attrition. (4) BFSI and Retail & CPG verticals grew 6.2% QoQ and 8.8% QoQ.

Outlook: TCS' industry leadership and gold standard in execution/scale will be supported by industry tailwind of core system modernisation by enterprises. We have factored in USD revenue growth of -1.2%, 12.7%, 10.5% for FY21/22/23E with 3Q/4QFY21 at 2.6/2.7% QoQ. EBIT margin factored at 25.1/25.9% for 3Q/4Q and 26.5%, 26.6% for FY22/23E. Valuations are at 25.5/22.8x with FY20-23E EPS CAGR at 11% (16.9% CAGR over FY21-23).

Shares of TATA CONSULTANCY SERVICES LTD. was last trading in BSE at Rs.2737.4 as compared to the previous close of Rs. 2716.15. The total number of shares traded during the day was 277896 in over 19870 trades.

The stock hit an intraday high of Rs. 2769 and intraday low of 2703. The net turnover during the day was Rs. 758445543.

Source : Equity Bulls

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