Maintain REDUCE on Tata Consultancy Services - Positives factored in - HDFC Securities

Mr. Apurva Prasad & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities.

Tata Consultancy Services (Q1FY21 Results Review): Positives factored in. Maintain REDUCE.

(TP Rs 1980, CMP Rs 2204 MCap Rs 8272 bn)

We maintain REDUCE on TCS, following a miss on 1Q revenue/margin, offset by improving outlook. Valuations at >1SD more than adequately factor in the recovery trajectory, although the improving near-term visibility could keep the stock price elevated. Key positives include the following: (1) growth recovery is expected from 2Q (reversal of supply dent ~150bps); (2) BFSI vertical resilience is supported by strong deal wins (book-to-bill at 1.33x ex- Standard Life) and pipeline; (3) recovery trajectory is expected in continental Europe; (4) the company's strong cash generation is supported by a stable DSO in a tough quarter. Key concerns include: (1) recovery lag in Retail & CPG vertical (sub-vertical impact), manufacturing vertical, and (2) UK geography's performance (BFS weakness). Our target price of Rs 1,980 is based on 21x FY22E (+2% increase in EPS estimate).

1QFY21 highlights: (1) Revenue and margin were lower than expected with a revenue decline of 6.9% QoQ (CC terms) and an EBIT margin decline of 149bps QoQ to 23.6%. (2) Significant demand reduction in Retail & CPG vertical. (3) The lateral hiring, which was frozen earlier, has been re-started selectively, while fresh on-boarding of 40,000 in FY21E is on track from July.

Outlook: We expect the USD revenue growth at 1.0%/2.4%/3.3% QoQ and EBIT% of 24.0%/25.0%/25.6% over 2Q-4QFY21E respectively. FY20-22E EPS CAGR at 4.5% includes -4.9% in FY21E; valuation is at 26.9/23.4x FY21/22E EPS.

Shares of TATA CONSULTANCY SERVICES LTD. was last trading in BSE at Rs.2204.35 as compared to the previous close of Rs. 2217.65. The total number of shares traded during the day was 119208 in over 7570 trades.

The stock hit an intraday high of Rs. 2244.65 and intraday low of 2192.6. The net turnover during the day was Rs. 263309698.

Source : Equity Bulls

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