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  • CMP : 3,280.8 Chg : 63.0 (1.96%)
  • Target : 3,630.0 (16.31%)
  • Target Period : 12 Month
Result Update

11 Oct 2022

Strong Q2 numbers…

About The Stock

Tata Consultancy Services (TCS) is one of the leading IT service providers with a presence in BFSI, communication, manufacturing, retail & hi tech.

  • Consistent organic revenue growth and industry leading margins (>25%)
  • Stable management, robust return ratios (>RoCE 40%) & payouts (~70%)
Q2FY23 Results:

TCS reported strong revenue & margin growth for Q2.

  • Reported CC growth of 4% QoQ & 15.4% YoY, respectively
  • EBIT margins improved 90 bps QoQ to 24% for the quarter
  • TCV remained steady at US$8.1 billion (bn)
What should Investors do?

TCS’ share price has grown by ~2.5x over the past five years (from ~₹ 1,227 in October 2017 to ~₹ 3,121 levels in October 2022).

  • We maintain BUY rating on the stock
Target Price and Valuation

We value TCS at ₹ 3,630 i.e. 26x P/E on FY25E EPS

Key Triggers for future price performance
  • New organisation structure, which is aimed at increasing customer stickiness, is expected to enhance market share gains
  • Increase in outsourcing in Europe, vendor consolidation and deal pipeline leading to rupee revenue CAGR of 9.4% over FY22-25E
  • We expect margins to improve from FY23 onwards due to utilisation improvement, moderation of sub-contractor costs. We build in margin expansion of 130 bps over FY23-25E
  • Double-digit return ratios, strong cash generation and healthy payout
Alternate Stock Idea:

Besides TCS, in our IT coverage we also like Infosys.

  • Key beneficiary of improved digital demand, industry leading revenue growth and healthy capital allocation prompt us to be positive

 

  • BUY with a target price of ₹ 1,760

Particulars

Particulars (₹ crore) Amount
Market Capitalization 1,187,022.3
Total Debt 7,818.0
Cash & equivalents 48,483.0
EV 1,110,860.0
52 week H/L (₹) 4,382.0/2,866.6
Equity Capital 362.0
Face Value (₹) 1.0

Price Chart

Recent Events & Key Highlights

  • Declared interim dividend of | 8 per share
 
  • Key Risk: i) Higher-than-expected attrition, ii) Deteriorating TCV

Research Analyst

Sameer Pardikar
sameer.pardikar@icicisecurities.com

Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY20 FY21 FY22 5 year CAGR (FY17-22) FY23E FY24E FY25E 3 year CAGR (FY22-25E)
Net Sales 156,949.0 164,177.0 191,754.0 12.9 218,226.0 235,293.2 251,410.5 9.4
EBITDA 42,110.0 46,546.0 53,057.0 13.2 58,048.1 64,235.0 69,137.9 9.2
EBITDA Margins (%) 26.8 28.4 27.7 - 26.6 27.3 27.5 -
Net Profit 32,340.0 32,430.0 38,327.0 9.9 42,335.2 47,679.6 51,090.8 10.1
EPS (|) 86.2 86.7 104.7 9.9 115.7 130.3 139.6 -
P/E 36.1 35.5 29.8 - 27.0 23.9 22.3 -
RoNW (%) 38.4 37.5 43.0 - 42.0 41.0 38.6 -
RoCE (%) 44.4 45.9 51.4 - 49.3 48.7 46.3 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • TCS reported 4% QoQ, 15.4% YoY CC revenue growth for the quarter. Dollar revenues were up 1.4% QoQ and 8.6% YoY to US$6,877 million (mn), implying 260 bps cross currency headwinds for the quarter
  • In terms of revenue by geographies (in CC terms), the North America market (54% of mix), grew 17.6% YoY while UK and Continental Europe reported growth of 14.8% and 14.1% YoY, respectively. India, Asia Pacific and MEA regions grew 16.7%, 7.0% and 8.2% YoY, respectively. Vertical wise, growth was aided by retail, BFSI, media & comm and healthcare, which grew 22.9%, 13.1%, 18.7% and 14.5% YoY, respectively
  • LTM attrition continued to inch up to 21.5% (up from 19.7% in the previous quarter). The management in Q1FY23 earnings call had indicated that LTM attrition is likely to be at an elevated level in H2 and is expected to moderate in H2. In continuance of its commentary, the company mentioned that LTM attrition in Q2 could be at a peak and is expected to moderate from here onwards. The management also indicated it is also a function of job market demand supply mismatch, which is now cooling off for tech talent
  • The company added 9,840 net associates in Q2, taking the total to 616,171. TCS also indicated that it hired around 20,000 freshers in Q2
  • On a reported basis, TCV for the quarter was at US$8.1 bn, which was largely constant for two consecutive quarters (it reported US$8.2 bn TCV in Q1). The company continued to maintain that steady state deal win number for the quarter could be in the range of US$7-9 bn in the foreseeable future. TCS also indicated that the deal win number was also impacted by currency movement
  • EBIT margin for the quarter was up 90 bps QoQ at 24%. There was a positive impact of currency (rupee depreciation against dollar) as well as utilisation improvement. Margin headwinds for the quarter were normalisation of travelling and facility expenses as well as increase in backfilling costs due to high LTM attrition. The company maintained its earlier guidance of exit margins of 25% in Q4FY23
  • TCS indicated that it has hired 35,000 freshers in H1FY23 (15,000 in Q1 and 20,000 in Q2) and maintained guidance of 40,000 fresher additions in FY23, which implies that pace of fresher additions is likely to come down in H2. The company also indicated that fresher hiring is being done keeping an eye on long term demand outlook and there could be some variation in quarterly trends. TCS clarified that it is honouring all fresher’s offers. It has also indicated that 70% of employees have been paid 100% variable payout while rest 30% of employees would be paid on the basis of performance
  • TCS indicated that demand for the US market continued to robust, which is a function of continued strong deal execution. It also indicated that near term outlook also looks strong with healthy TCV of US$2 bn+ for the market. The company indicated that it has not picked up any sign of growth moderation in the region as well as change in spending pattern across clients. TCS is also not seeing any deal cancellation or delay in the project execution in the region. The company expects normal seasonality in the US market for the December quarter
  • Regarding Europe region, the company continued to see robust numbers as it indicates that Europe is going through a strong tech cycle where technology is a key driver in both revenue and cost reduction programmes. TCS believes that it is playing that cycle well and continues to gain market share there, which is also a reflection of its continued strong growth of 14%+ on a YoY basis in Q2. However, the company indicated that the near term outlook for the Europe region is cautious due to continued geopolitical risks and volatility in the upcoming winter regarding energy requirements. The order book in Q2FY23 grew 33% QoQ for Europe
  • The management indicated that it expects a margin improvement, going forward. Some margin tailwinds are i) rupee depreciation, ii) pricing increase, iii) utilisation improvement (as fresher hiring is likely come down), iv) moderation of subcontractor costs, which is likely to mitigate normalisation of travel expenses and facility expenses. Subcontractor costs as percentage of revenue dipped marginally to 9.9% of sales in Q2FY23 vs. 7.6% it achieved few quarters back. Facility expenses as a percentage of sales is currently at 1.2%, up from the Covid quarter low of 0.6% of sales
Variance Analysis
 
   Q2FY23   Q2FY23E   Q2FY22   YoY (%)   Q1FY23   QoQ (%)   Comments 
Revenue (US$ mn) 6,877 6,882 6,333 8.6 6,780 1.4 Revenue grew 4% QoQ in CC term driven by continued growth momentum in BFSI, retail, manufacturing, etc
Revenue (| crore) 55,309 54,916 46,867 18.0 52,758 4.8 Revenue growth was aided by the North America region, which grew 17.6% YoY in CC terms while vertical wise retail, BFSI, media & healthcare grew 22.9%, 13.1%, 18.7% & 14.5% YoY, respectively, in CC terms
Employee expenses 32,526 32,675 27,048 20.3 31,553 3.1  
               
Gross Margin 22,783 22,241 19,819 15.0 21,205 7.4  
Gross margin (%) 41.2 40.5 42.3 -110 bps 40.2 100 bps  
SG&A expenses 8,267 8,018 6,704 23.3 7,788 6.2  
               
EBITDA 14,516 14,223 13,115 10.7 13,417 8.2  
EBITDA Margin (%) 26.2 25.9 28.0 -174 bps 25.4 81 bps  
Depreciation 1,237 1,263 1,115 10.9 1,231 0.5  
EBIT 13,279 12,960 12,000 10.7 12,186 9.0  
EBIT Margin (%) 24.0 23.6 25.6 -160 bps 23.1 91 bps EBIT margin expanded due to currency depreciation & utilisation related benefits, which was mitigated, to some extent, due to normalisation of travel & facility expenses as well as increase in backfilling costs amid high attrition
Other income (less interest) 817 600 969 -15.7 590 38.5  
PBT 14,096 13,560 12,969 8.7 12,776 10.3  
Tax paid 3,631 3,458 3,316 9.5 3,257 11.5  
Reported PAT 10,431 10,062 9,624 8.4 9,478 10.1  
Adjusted PAT 10,431 10,062 9,624 8.4 9,478 10.1  

Disclaimer

ANALYST CERTIFICATION

I/We, Sameer Pardikar, MBA, Sujay Chavan, MMS Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts valuation for a stock

Buy: >15%

Hold: -5%to 15%;

Reduce: -15% to -5%;

Sell: <-15% 

Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

 

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

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Mumbai – 400 093

 

 

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