Tata Consultancy Services - Q1FY22 Results Review Report - Strength in core segments - HDFC Securities

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

We maintain ADD on TCS, supported by strength in core segments (Q1 miss on India revenue to reverse) and continuity in market share gains (book-to-bill at 1.3x as compared to 1.2x for Accenture outsourcing). Growth drivers for the company include (1) calibrated focus on upstream/consulting business (larger share of G&T) increasing the addressable market/pipeline, (2) increased outsourcing (Europe), core transformation deals, and strong growth in public hyperscaler services, (3) strong deal wins in retail & CPG vertical and increased deal volumes (not TCV) in BFSI, and (4) near-term lift-off with recovery in regional market segment (India revenue). Increasing the supply-side pressure (attrition headed towards double digits, yet industry-best) and return of discretionary spend (ex-travel) will cap margin gains despite operating leverage and differential pricing. Our target price of INR 3,650 is based on 30x Jun-23E EPS with EPS CAGR at 14% over FY21-24E.

1QFY22 highlights: (1) Revenue came at +2.4% QoQ CC (+16.4% YoY), lower than our estimate (+3.5% QoQ CC). (2) EBIT margin was at 25.5%, -133bps QoQ, impacted by wage hike -170bps (including +30bps lower sub contacting), offset by INR depreciation (+30bps). (3) Revenue growth led by life sciences (+7.3% QoQ CC) in 1QFY22. Manufacturing and retail & CPG verticals grew 4.8% QoQ and 4.4% QoQ in CC terms, supported by ramp-up of deal wins and strong bookings in the quarter. (4) Net additions were the highest ever (20,409 net adds), taking the headcount to over 0.5mn with attrition increasing to 8.6% TTM. (5) Deal TCV in Q1 was USD 8.1bn (in-line) with book-to-bill at 1.32x (1.42x in FY21 had high deal tenure as compared to 1.23x in FY20). The total deal wins included BFSI TCV at USD 2.2bn, retail & CPG TCV at USD 1.5bn and NorthAm TCV at USD 4bn.

Outlook: We have factored in USD revenue growth of 15.8%/10.5%/9.3% for FY22/23/24E with 2QFY22 at 3.5% QoQ. EBIT margin for TCS is factored in at 25.8%/26.6%/26.9% for FY22/23/24E. Valuations are at 31/27x (FY22/23E) with FY21-24E EPS CAGR at 14%.

Shares of TATA CONSULTANCY SERVICES LTD. was last trading in BSE at Rs.3207.75 as compared to the previous close of Rs. 3257.1. The total number of shares traded during the day was 232383 in over 21551 trades.

The stock hit an intraday high of Rs. 3281 and intraday low of 3200. The net turnover during the day was Rs. 750087670.

Source : Equity Bulls

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