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Tata Consultancy Services Ltd>
  • CMP : 3,642.9 Chg : 16.20 (0.45%)
  • Target : 4,120.0 (11.35%)
  • Target Period : 12-18 Month

18 Apr 2022

Long tail of attrition

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%)

TCS reported its Q4FY22 results

  • Dollar revenues grew 2.6% QoQ to USD 6,696 million, up 14.3% YoY in CC terms
  • EBIT margins were flat at 25.0% for the quarter
  • The company’s TCV was at USD11.3 billion at Q4FY22
What should Investors do?

TCS’ share price has grown by ~3.3x over the past five years (from Rs 1097 in January 2017 to Rs 3700 levels in April 2022)

We revise our rating on the stock from BUY to HOLD

Target Price Valuation

We value TCS at Rs 4120 i.e. 31x P/E on FY24E EPS

  • TCS is key beneficiary of multi-year growth (15-20%) in digital technologies
  • Increase in outsourcing in Europe, vendor consolidation and deal pipeline leading to revenue CAGR of 12.2% over FY22-24E
  • We expect margins to be under pressure till FY24, resulting in margin contraction of 30 bps in FY22-24E
  • Double-digit return ratios, strong cash generation and healthy payout
Alternate 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 Rs 2300

  • TCS reported 2.6% QoQ growth to US$6,696 million (mn) while it grew 11.8% on a YoY basis. The company reported 14.3% YoY growth in CC terms for Q4. For FY22, TCS reported revenues of US$25.707 billion (bn), up 15.9% over FY21, CC growth of 15.4% over FY21
  • In terms of revenues by geographies (in CC terms), the North America market (53% of mix), grew 18.7% YoY while UK and Continental Europe reported relatively muted growth of +13% and 10% YoY, respectively. Asia Pacific, India and MEA regions grew 5.5%, 7.0% and 7.3% YoY, respectively
  • Vertical wise, BFSI, retail & healthcare grew 12.9%, 22.1% and 16.4% YoY while manufacturing, technology & services and media grew 19.0%, 18.0% and 18.7% YoY, respectively
  • As per the management, the demand environment continues to be strong as reflected in the deal pipeline. The management indicated that in a scenario where clients are facing cost pressure, technology spend is the last area to get hit since technology spend is now looked as a solution enabler vs. being discretionary spend earlier
  • Attrition was at 17.4% (up from 15.3% in the previous quarter) but the management indicated that quarterly annualised attrition has started tapering down. The company added 35,209 associates in Q4, taking the total to 592195. It is the highest quarterly addition ever. For FY22, it added more than 1 lakh employees, which is 2.5x net adds it did in FY21
  • The company’s TCV for the quarter was at US$11.3 bn. However, TCS indicated that it includes two large deals of US$1 bn each (as per our understanding, second phase of Passport Seva could one of those large deals, which was won by TCS as per media reports) while the adjusted number is US$9.3 bn. The company indicated that steady state deal win number for the quarter could be in the range of US$8-8.5 bn, going forward
  • EBIT margin for the quarter was flat QoQ at 25%. There was -90 bps impact due to supply side challenges. It was mitigated by operating efficiency (not quantified) and +10 bps currency benefit. The company indicated that there would be volatility in margins in the near to medium term due to supply side challenges but maintained long term aspirational EBIT margin guidance band of 26-28%
  • TCS indicated that it is planning to hire 40,000 freshers in FY23, which would help in pyramid optimisation
  • The company indicated that growth in continental Europe for the quarter was muted due to some re-allocation in client budget in the region due to emergence of multiple scenarios on account of current geopolitical headwinds. TCS indicated that growth in the regions would moderate till the issues settle down
  • TCS indicated that the current digital transformation opportunity has three horizons where horizon 1 pertains to moving one’s onsite applications to cloud, which is currently playing out. There are further opportunities, which are termed as Horizon 2 (cloud native application development) and Horizon 3 (end to end ecosystem play for sectors like pharma, manufacturing, etc)
  • The company indicated that it has formed a new operating model for the future wherein employees are being aligned to the new structure. The rationale for the new operating structure is to be able to align the right people for management of customer lifecycle and strengthen their position as a preferred partner in case of vendor consolidation from the client’s side


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