According to ICICI Direct, Buy Tata Consultancy Services in the range of Rs 2270.00–2305.00 for target price of Rs 2650.00 with a stop loss of Rs 2110.00. Time Frame: Six months.
ICICI Direct's research report on Tata Consultancy Services
Strategy
Buy Tata Consultancy Services in the range of Rs 2270.00–2305.00 for target price of Rs 2650.00 with a stop loss of Rs 2110.00. Time Frame: Six months.
Technical View
IT sector has been one of the major outperformer in the last five months pullback since market bottoming out in March 2020. In the last one month breather, the IT stocks has shown resilience and has formed a higher base for the next leg of up move. IT major TCS has lead the way and has recently generated a breakout above the last two year almost identical highs (Rs 2275 and 2296 respectively) highlighting strength and positive price structure. The entire breather of the last one month has taken the shape of a bullish Flag formation and during current week trade it has registered a breakout above the same thus offering fresh entry opportunity. We expect the stock to continue its up move and head towards Rs 2650 levels in the coming months as it is the 138.2% external retracement of the entire decline (Rs 2296-1506) placed around Rs 2650 levels.
Fundamental View
Tata Consultancy Services (TCS) is an IT service company catering to various segments like Banking & Insurance (~30% of revenues), communication (~7%), manufacturing (~10%), life science & healthcare (~8%), technology & services (~9%), Regional Markets (~20%) and CPG & retail (~15%). Geographically, the company generates ~52% revenues from Americas, 31% from Europe and 17% from rest of the world. Considering the company’s ability to win large deals, platform differentiation and client mining capability, we expect TCS to bounce back faster than peers as seen in historical performance. In addition, TCS’ Secure Borderless Workspace (SBW) delivery model and Machine First Delivery Model (MFDM) framework will provide unique differentiation for its services. We believe there are long term drivers for the company in terms of market share gains, acceleration in digital technologies and vendor consolidation based on company’s execution. Hence, we expect the company to continue registering industry leading revenue growth in coming years. Further, in terms of margins, we expect the company to see a meaningful recovery in FY22E mainly led by cost rationalisation. The company’s knack of winning large deals across segments & geographies, strong execution, cost rationalisation and client mining capability it has been able to register consistent performance in revenues and margins. TCS has best in class margins (~27% EBITDA margins) and RoCE (~44%). We expect the company to continue delivering industry leading growth and higher return ratios in coming years. Further, the company has maintained healthy cash flow generation and has a consistent dividend payout policy. Hence, we remain positive on the stock from a long-term perspective.
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