Hold TCS; target of Rs 2540: ICICI Direct

ICICI Direct's research report on TCS

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 Rs 30,541 crore, marginally ahead of our 2.9% growth estimate of Rs 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 Rs 6,446 crore was ahead of our Rs 6,267 crore estimate led by a better-than-expected operational performance. TCS declared a dividend of Rs 7 per share.

Outlook

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 Rs 2540.

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