Analyst Corner: Edelweiss maintains ‘buy’ rating on TCS with target price of Rs 2,310

All industry and geography segments plunged, barring healthcare and Europe, respectively.

By Edelweiss Securities

Tata Consultancy Services (TCS) reported a sharp 7.1% quarter-on-quarter (q-o-q) dip in $ revenue growth in Q1FY21 versus our 4.0% decline estimate. Ebitda margin came in at 26.2% versus our 26.6% estimate.

All industry and geography segments plunged, barring healthcare and Europe, respectively. While the company’s performance was weaker than anticipated, we believe $6.9 billion TCV (up 20% y-o-y) along with calling out of Q1FY21 as a peak pain quarter by the CEO is extremely positive.

Moreover, the management reiterated that faster digital adoption (led by jump in online activity) and transformation of the core would be key structural growth drivers going ahead. We reiterate that the industry is entering a high-growth phase, accentuated by the current pandemic, leading to complete change in consumer behaviour.

This, we believe, will trigger structural jump in demand going forward. We maintain a ‘buy’ rating with a target price of Rs 2,310.

Worst is behind, structural uptick is ahead. While TCS posted a weak set of Q1FY21 numbers, we believe the management’s outlook is encouraging, led by three key areas: Transformation/upgradation of the core, which was stress-tested with the surge in online activity triggered by Covid-19; significant spurt in enterprise spends in improving front-end consumer experience, spends by clients on developing zero-touch experience; focus on efficient execution to help meet aspirational margin.

Margin plunged 150bps q-o-q, despite low travel costs and 6% INR depreciation, due to sharp fall in growth (down ~7% q-o-q).

TCS expects margin to recoup with revenue growth bouncing back, which we expect to commence from Q2FY21. It is planning to tighten execution, which will enable it to achieve 26-28% aspirational margin range.

FY22-24 will be stronger and we maintain ‘buy’ While FY21 is likely to be a washout year for the tech industry from growth perspective, we strongly believe enterprises will have to spend a lot more on technology to retain customers, fulfil their experience expectations and upgrade capacity of core infrastructure to handle the surge in online activity.

TCS, with its 300K+ workforce trained in digital transformation & cloud, will be key beneficiary of this wave of spend. While in near term the stock looks fairly valued at 23x FY22e, the high growth momentum will sustain till FY24. We maintain ‘BUY/SO’ with target price of Rs 2,310.