Tata Consultancy Services Ltd. : TCS July 2020

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Tata Consultancy Services Ltd.

CMP:INR 2204, MCap: INR8,28,000 cr

Results lower than estimates, Management commentary provides Silver lining

Q1FY21 Result – Missed Estimates:

✅USD term revenue de-grew by 7% sequentially and 7.8% YoY to $ 5,059 Mn; slightly lower than street estimates.
✅CC terms revenue de-grew 6.3% YoY again marginally lower than street estimates.
✅EBIT margin came at 23.6% against 24.2% in the corresponding period of previous year and lower than expectation of 24.5%.
✅PAT came at INR 7,008 cr, a drop of 13.8% YoY, and lower than market expectation of INR 7,300 cr.

Operational Performance: Deal wins remained positive


✅New deal wins came at $6.9 bn, 20% higher than the corresponding period of previous year and indicating strong momentum in deal signs even in lockdown.
✅Net manpower addition came down by 4,788 QoQ to 4,43,676 people which indicate strong cash conservation approach.
✅Attrition remained healthy at 11.1% and came down sequentially.
✅Except Healthcare, all other verticals de-grew sequentially and YoY basis.
✅Geography wise, except Europe, all other regions de-grew.

Management Commentary: Provides Silver lining

✅Management believes the business has bottomed out and recovery will be visible going forward.
✅Around 20% of the business impact in Q1FY21 was due to supply side impact and that is expected to get solved going forward.
✅Reaction of global companies and Governments were prompt during the pandemic and that is expected to drive the business growth going forward.
✅Customers launched new business transformation programs or restart deferred programs during the quarter. This is indicative of business confidence returning in pockets.
✅Deal pipeline is strong and management believes in Q4FY21 revenue will recover and will see a flat CC term performance.
✅Focus on digital infrastructure creation by clients is driving the growth in deal wins.
✅Vendor consolidation and flight to quality aided market share gain for TCS.
✅All hiring activity and salary growth is at halt to deal with Covid uncertainty.

Our View & Valuation: Stock will see pressure in near term

Results came marginally lower than expectations both in growth and margin side. But in a scenario, where the stock has given more than 25% return since the previous quarter result announcements and trading near its highest valuation band, a marginal miss will be taken negatively by the market. At CMP, the stock is trading 26x/24x of FY21/22E EPS.
 
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