TCS hits new record high post Q4 FY18 result; CLSA raises target to Rs 3,700/share

Tata Consultancy Services share has rallied 6.5 percent intraday to hit a fresh record high of Rs 3,399.90 on Friday after reporting healthy performance for the March quarter as well as FY18. At 11:39 hours IST, the share price was quoting at Rs 3,383.00, up Rs 191.85, or 6.01 percent.

The sharp rally added nearly Rs 40,000 crore to the market capitalisation of the company, taking total market cap to Rs 6.5 lakh crore.

The sharp depreciation in the rupee also boosted sentiment. The rupee breached 66 against the dollar, falling 25 paise to hit a 13-month low of 66.05 a dollar.

In fact, TCS' earnings and weak rupee pushed all technology stocks higher. Infosys, HCL Technologies, Wipro and Tech Mahindra gained between two and four percent.

Country's largest IT services provider TCS, on Thursday, beat analyst expectations on all front barring operating profit margin that was in line.

Consolidated profit grew by 5.7 percent sequentially to Rs 6,904 crore and revenue increased 3.8 percent to Rs 32,075 crore for the quarter ended March 2018. Strong revenue growth and higher other income (up 13.7 percent QoQ) boosted profitability.

"Strong demand in digital across all industry verticals and large transformational deal wins have made this one of best fourth quarters in recent years. The strong exit allows us to start the new fiscal on a confident note," Rajesh Gopinathan, CEO and MD, TCS, said.

The 3.9 percent revenue growth QoQ in dollar terms, the highest in last 14 quarters, was also much higher than street expectations. Dollar revenue growth on year-on-year basis was in double digit at 11.68 percent.

"Dollar revenue growth was above our 2.4 percent QoQ growth and USD 4,901.9 million estimate. The dollar revenue growth was supported by strong cross currency tailwind (1.9 percent in our view)," ICICIdirect Research said.

Revenue growth in constant currency terms was up two percent (against consensus estimates of over a percent). Volume growth too was up two percent QoQ.

Most brokerage houses maintained their ratings as the stock has already rallied more than 44 percent in the last one year, but raised the target price on the stock post its earnings.

While reiterating its Buy rating on TCS and raising target price to Rs 3,700 per share (from Rs 3,250 earlier), global brokerage house CLSA said Q4 revenue beat estimates sharply, hence it upgraded FY19-20 revenue & EPS estimates by 1 percent.

It expects the company to maintain payout ratios and expects a buyback/dividend to compensate for a lower payout in FY18.

Prabhudas Lilladher said TCS is currently trading at par with Accenture on the valuation front (versus 18 percent discount to Accenture trades three months ago). Uptick in revenue trajectory leads to re-rate multiples. We value TCS at 21x FY20E EPS (versus 17.5x FY20E earlier) which yields a target price of Rs 3,380 per share. This represents a 20 percent upgrade in target price. It retained Accumulate rating.

TCS delivered a strong set of performance for Q4FY18 with a beat on USD revenues and PAT.

It delivered 6.7 percent constant currency revenue growth for FY18 (8.6 percent USD revenue growth for FY18). This is better than Infosys which delivered 5.8 percent YoY constant currency growth in FY18.

Led by solid Q4 revenue beat, we expect TCS to deliver 11.3 percent USD revenue growth for FY19E (versus 9.5 percent growth modelled earlier). This marks an uptick in revenue trajectory.

However, we retain our EBIT margin assumptions at 24.4/24.1 percent for FY19/FY20E (versus 24.8 percent delivered in FY17) as most of TCS' recent large deal wins have a large onsite rebadging component. Led by USD revenue upgrade and modest INR reset to lower levels, we upgrade EPS estimates by 1.4/2 percent for FY19/FY20E to Rs 149/161 per share.

Jefferies also retained its Hold rating on the stock as it feels most of the improved outlook already priced into stock price, but upped target price to Rs 3,200 (from Rs 2,500 earlier) as Q4 revenue was ahead of expectations in dollar terms.

"We build in 8.5-10 percent constant currency revenue growth over FY19-21 against 6.7 percent reported in FY18 and also build in flattish margin over FY18-21 as we expect continued pricing pressure," the research house said.

Kotak Securities, however, maintained its Reduce rating on the stock but raised target price to Rs 3,100 (from Rs 2,700) as it expects a better FY19 & forecast constant currency revenue growth of 9.2 percent.

"Justifying current valuation requires baking in USD 2.1 billion of incremental revenue in FY19 and justifying current valuation requires 11 percent CAGR over the next 7 years," it said.