Tata Consultancy Services – Fiscal 22 First Quarter Results Review Report – Strength in Key Segments – HDFC Securities

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

We maintain the ADD on TCS, supported by the strength of the core segments (first quarter sales in India to be reversed) and the continuity of market share gains (book-to-bill at 1.3x against 1 , 2x for the outsourcing of Accenture). Growth drivers for the company include (1) a calibrated focus on consulting / upstream activities (larger share of G&T) increasing the market / addressable pipeline, (2) increased outsourcing (Europe), core transformation deals and strong growth in hyperscaler utilities, (3) strong contracts in the retail and GIC verticals and increased (non-TCV) transaction volumes in BFSI, and ( 4) a short-term take-off with a recovery in the regional market segment (sales in India). Increasing supply-side pressure (double-digit attrition, but the best in the industry) and the return of discretionary spending (excluding travel) will cap margin gains despite operating leverage and differential pricing. Our price target of INR 3,650 is based on a 30x Jun-23E EPS with a 14% EPS CAGR on FY21-24E.

Highlights of 1QFY22: (1) Revenue was + 2.4% QoQ CC (+ 16.4% YoY), lower than our estimate (+ 3.5% QoQ CC). (2) The EBIT margin stood at 25.5%, -133bps QoQ, impacted by the increase in salaries -170bps (including + 30bps in sub-contracting down), offset by the depreciation of the INR (+ 30bps). (3) Sales growth driven by life sciences (+ 7.3% QoQ CC) at 1TFY22. The manufacturing, retail and consumer staples verticals grew 4.8% QoQ and 4.4% QoQ in terms of CC, supported by the ramp-up of deals and strong reservations during the quarter. (4) Net additions were the highest on record (20,409 net additions), bringing the workforce to over 0.5 million with attrition increasing to 8.6% TTM. (5) The TCV of the transaction in the first quarter was $ 8.1 billion (online) with a book-to-bill at 1.32x (1.42x during FY21 had a high trade duration compared to 1.23x in FY20). The total number of deals won included the $ 2.2 billion BFSI TCV, the $ 1.5 billion retail & CPG TCV and the $ 4 billion NorthAm TCV.

Outlook: We have taken into account revenue growth in USD of 15.8% / 10.5% / 9.3% for FY22 / 23 / 24E with 2QFY22 at 3.5% QoQ. TCS’s EBIT margin is taken into account at 25.8% / 26.6% / 26.9% for fiscal year 22/23 / 24E. Valuations are at 31 / 27x (FY22 / 23E) with a CAGR EPS FY21-24E at 14%.

Shares of TATA CONSULTANCY SERVICES LTD. was last trading on the BSE at Rs.3207.75 from the previous close of Rs. 3257.1. The total number of shares traded during the day was 232,383 in more than 21,551 transactions.

The stock hit an intraday high of Rs. 3,281 and an intraday low of 3,200. Net turnover during the day was Rs. 750087670.

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