October 11, 2024
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Tata Consultancy Services Stock Research Report by Prabhudas Lilladher
Analysis dated 11 October 2024
Sector: IT Services & Consulting
Price on Analysis date: Rs. 4227
Target Rs. 4920
(16.4% upside potential)
Target Period: 12 Months
Tata Consultancy Services Stock Research Report
TCS reported revenue of USD 7.7 bn, up ~1.1% QoQ CC below our & consensus estimate of 1.5% & 1.3% QoQ CC growth respectively while in dollar terms the revenue grew by 2.2% QoQ (PLe 2.3% & consensus estimate of 1.9% QoQ growth).
The growth during the quarter was largely driven by Regional market, predominantly the BSNL deal that is at its peak (~150 bps contribution in Q2 per our estimates). Green shoots continued in BFSI, while growth within certain pockets remained volatile, partly attributed to work re-scoping and weak spending sentiment.
EBIT margin declined by 60 bps QoQ to 24.1%, on account of higher third-party expenses and inching-up subcon cost, which partly offset by currency tailwinds & missing Q1 wage hike impact. TCV grew by 3.6% QoQ to USD 8.6 bn and BTB remained stable at 1.1x.
Apart from the continued momentum within Regional market, the BFSI growth recovery was strong (+1.9% QoQ) and contributed meaningfully in Q2. However, continued volatility within consumer-oriented and asset-heavy verticals diluted the consolidated growth, while client-specific issues within Life Science further put a dent to the topline. Despite the weak show, the management was confident to stabilize Q3 performance and pickup pace in Q4, while the ramp up of BSNL deal would continue to support the growth in H2.
Additionally, the re-scoping activity with a large account is largely stabilized and it expects the Life-Science vertical to recover in H2. With strong employee addition for the second consecutive quarter and elevated deal TCV (1.1x BTB) imply growth visibility in the coming quarters, while we believe the weakness in other verticals is largely aligned to the adverse macros and should recover by early FY26. We are cutting our revenue growth estimates by 10 and 40 bps for FY25E and FY26E and baking in 6.4%/8.0%/9.4% USD revenue growth for FY25E/FY26E/FY27E.
The decline in margin was majorly attributed to the continued ramp up of BSNL deal, while high-margin business growth was largely weak in Q2. The quarter has marked peak revenue for BSNL deal, which should continue its momentum before it achieves the maintenance phase by early FY26. The ramp up phase of the deal would continue in H2 and pressurize margins for the segment. Since the margin miss was meaningful in Q2, we are broadly aligning the same and cutting our estimates by 60bps and 30bps YoY for FY25E/FY26E.
Valuations and outlook:
We believe the company’s business mix is more favorable to the current enterprise spends which are diverted to stimulate core business functions or bring efficiency to their operations. TCS is well positioned to capture those spends and win disproportionately among its peers. We estimate USD revenue/earnings CAGR of 8.0%/11.8% over FY24-FY27E. The stock is currently trading at 24x FY27E, we are assigning P/E of 28x to FY27E with a target price of INR 4,920. We maintain “BUY” rating.
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