October 13, 2017 ICICI Securities Ltd | Retail Equity Research Result Update Dollar revenue in line, margins surprise… US$ revenues grew 3.2% QoQ to $4,739 million, in line with our 3.2% QoQ growth and $4,739 million estimate. Constant currency revenues grew 1.7% QoQ led by volume growth (3.2% QoQ) Rupee revenues grew 3.2% QoQ to | 30,541 crore, marginally ahead of our 2.9% growth estimate of | 30,453 crore At 25.1%, EBIT margins expanded 170 bps and were above our 130 bps expansion and 24.6% estimate mainly on account of better-than- expected revenue growth and lower SG&A (down 1.9% QoQ) PAT of | 6,446 crore was ahead of our | 6,267 crore estimate led by a better-than-expected operational performance. TCS declared a dividend of | 7 per share Going ahead: Cautious on BFSI; optimistic on retail… Constant currency (CC) revenues grew 1.7% QoQ, lower than our estimates of 2% led by weakness in the retail & BFSI segment. While BFS is yet to see any meaningful improvement in fundamentals, a couple of deal wins in insurance segment expected to materialise in coming quarters would be a positive. For the retail segment, the management anticipates retail segment to have bottomed out and expects it to pick up in coming quarters on the back of increasing discretionary spends. Although a few deals are of significant size, deal size on overall front and, specifically in BFS, continues to remain small. A recovery on this front needs to be watched. We now expect dollar revenues to grow at a CAGR of 8.7% in FY17E-19E. Margins better than expectations … EBIT margins came in better than our expectations with a 170 bps uptick sequentially to 25.1% led by cross currency benefit (50 bps) accompanied by operational efficiency. Decline in SG&A as a percentage of revenue (16.9% in Q2 vs. 17.8% in Q1) was a primary reason for margin expansion coming in better than our estimates. The management continues to target its EBIT margin band of 26-28% (in CC terms) for FY18E. However, rupee appreciation, increased local hiring and demand for investments in digital could make it a rough ride. We tweak our margin estimates to 24.7%, 25.2% in FY18E, FY19E, respectively. Digital contribution @19.7% of revenues, grows 32.6% YoY… Digital contribution to overall revenues continues to pick up and is now at 19.7% to revenue vs. 18.9% in Q1FY18. It reported double digit growth for a third consecutive quarter on a YoY basis and grew 32.6% YoY. Keeping in view the transformation to digital, TCS has carried out a restructuring exercise in the previous quarter and reorganised its service lines. The management said the reorganised service lines successfully completed their transition in Q2, and are experiencing strong demand with transformational wins in respective domains. Await recovery in BFS; maintain HOLD… TCS surprised us positively on the margin front in Q2FY18. However, the management commentary on the demand environment remains a mixed bag. While the retail vertical has bottomed out, we are yet to see a recovery in its largest vertical i.e. BFSI on the deal size front. Hence, we continue to expect subdued earning growth (4.3%) in FY17-19. Nonetheless, FY19 FCF yield of ~5% lends us comfort on limited downside. Hence, we maintain our HOLD rating on TCS with a revised target price of | 2540. Rating matrix Rating : Hold Target : | 2540 Target Period : 12 months Potential Upside : 0% What’s Changed? Target Changed from | 2400 to | 2540 EPS FY18E Changed from | 133.1 to | 134.3 EPS FY19E Changed from | 148.6 to | 149.4 Rating Unchanged Quarterly Performance Q2FY18 Q2FY17 YoY (%) Q1FY18 QoQ (%) Revenue 30,541 29,284 4.3 29,584 3.2 EBIT 7,660 7,617 0.6 6,914 10.8 EBIT (%) 25.1 26.0 -93 bps 23.4 171 bps PAT 6,446 6,586 (2.1) 5,945 8.4 Key Financials | Crore FY16 FY17 FY18E FY19E Net Sales 108,646 117,966 123,033 137,087 EBITDA 30,678 32,311 32,419 36,739 Net Profit 24,215 26,289 25,713 28,604 EPS (|) 122.9 133.4 134.3 149.4 Valuation summary FY16 FY17 FY18E FY19E P/E 20.7 19.1 18.9 17.0 Target P/E 20.7 19.0 18.9 17.0 EV / EBITDA 15.3 14.0 14.0 11.9 P/BV 6.9 5.7 5.6 4.7 RoNW (%) 33.1 29.8 29.8 27.8 RoCE (%) 42.2 38.0 37.9 35.5 Stock data Particular Amount Market Capitalization (| Crore) 499,076.8 Total Debt (| Crore) 289.0 Cash and equivalents (| Crore) 28,826.7 EV (| Crore) 470,494.9 52 week H/L 2707 / 2055 Equity capital 197.0 Face value | 1 Price performance (%) 1M 3M 6M 12M TCS (0.3) 6.0 8.3 0.1 Infosys 2.9 5.6 (0.5) (10.2) Wipro 5.9 8.0 11.1 (2.5) HCL Tech 4.4 10.3 4.9 23.4 Research Analyst Deepak Purswani, CFA [email protected]Deepti Tayal [email protected]Tata Consultancy Services (TCS) | 2548
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October 13, 2017
ICICI Securities Ltd | Retail Equity Research
Result Update
Dollar revenue in line, margins surprise…
US$ revenues grew 3.2% QoQ to $4,739 million, in line with our
3.2% QoQ growth and $4,739 million estimate. Constant currency
revenues grew 1.7% QoQ led by volume growth (3.2% QoQ)
Price Idirect target Consensus Target Mean % Consensus with HOLD
Source: Company, ICICIdirect.com Research
Key events
Date Event
Apr-17
According to media sources, US accuses top Indian IT firms TCS and Infosys for violating H-1B visa norms by unfairly putting extra tickets in the lottery system for H-
1B visa applications. Putting extra visa applications was done in order to increase the chances of getting more H-1B visas
May-17
TCS selected by one of Europe's largest utilities companies 'Vattenfall' to provide IT services across multiple European operations including Sweden, Germany and
the Netherlands. It is a multi-year partnership in which TCS would be responsible for the development and maintenance of a large number of applications
May-17
TCS enters into partnership with semiconductor company Nexperia to transform its applications and infrastructure services. TCS selected to enhance its digital core
through its end-to-end enterprise application stack hosted on the TCS Cloud
Jun-17
TCS plans to launch several businesses in emerging technology segments to earn about $1 billion each from them over the next three to seven years. The company
expects 16 such new segments and sub-segments around cyber security, internet of things (IoT), analytics and cloud application and infrastructure to be key drivers
of growth, going ahead
Jun-17
TCS announces a new collaboration with Intel Corporation to build a "future-ready reference architecture" for enterprises. The collaboration will help firms adopt new-
age technologies like Internet of Things (IoT), Cloud, network, 5G, artificial intelligence and data centre infrastructure management
Sep-17
TCS secures a 15-year partnership with Scottish Widows, Lloyds Banking Group’s Life and Pensions unit to provide end-to-end policy administration services for its
4 million heritage customers. The partnership was won by TCS’s UK subsidiary Diligenta, which provides outsourcing services to the insurance industry. According
to media sources, TCS would take on 1000 insurance staff from client Lloyds Bank
Source: Company, ICICIdirect.com Research
Top 10 Shareholders Shareholding Pattern
Rank Name Latest Filing Date % O/S Position (m) Change (m)
1 Tata Group of Companies 30-Jun-17 73.5% 1,407.4 -36.1
2 Life Insurance Corporation of India 30-Jun-17 3.9% 74.3 2.4
3 Stewart Investors 31-Mar-17 1.2% 22.4 0.0
4 The Vanguard Group, Inc. 31-Aug-17 0.9% 16.4 0.6
ICICI Securities Ltd | Retail Equity Research Page 13
ANALYST CERTIFICATION
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