Maintain ADD on Tata Consultancy Services - Stellar performance continues - HDFC Securities

We maintain ADD on TCS, following a back-to-back stellar performance and positive commentary. Key positives included (1) broad-based (verticals & services) growth outperformance (strongest 3Q in nine years) supported by better conversions, (2) robust deal wins with TCV at USD 6.8bn (ex-PBS Deutsche deal), 9MFY21 TCV higher by 23% and strong bookings/ramp-up expected in 4Q, (3) margin outperformance supported by operating leverage & efficiencies. Management provided 'double-digit' outlook for FY22/CY21 (we have factored in 14.8% for FY22E) and 'sustainability of momentum' for 3-5 years secular cycle of cloud adoption. Strong outlook for BFSI vertical (strongest-ever BFSI deal bookings), investments in hyperscalers units, improving supply-side metrics (stronger linkages with revenue growth and an uptick in contextual masters), and lowest-ever attrition were other highlights. Our target price of Rs 3,435 is based on 28x Dec-22E EPS (27x earlier) with EPS CAGR at 19% over FY21-23E.

3QFY21 highlights: (1) Revenue came at the highest ever 3Q in the past nine years at 4.1% QoQ CC (0.4% YoY). (2) EBIT margin hit a 19-quarter high at 26.6%, +42bps QoQ supported by operating leverage and FX tailwind, which offset the negative impact of salary hike (-160bps QoQ). (3) Net additions included 1,500 from Pramerica Ireland (Prudential) and 12,000 trainees were onboarded in 3Q. (4) BFSI and Retail & CPG verticals grew 2% QoQ and 3.1% QoQ in CC terms and BFSI growth ex-seasonality impact was similar to 2Q.

Outlook: TCS' gold standard in execution/scale will be supported by industry tailwind of strong tech cycle. We have factored in USD revenue growth of 0.4%, 14.8%, 10.7% for FY21/22/23E with 4QFY21 at 3.9% QoQ. EBIT margin for TCS factored at 26.8%, 27.3% for FY22/23E. Valuations are at 28.4/24.6x with FY21-23E EPS CAGR at 19%.

Shares of TATA CONSULTANCY SERVICES LTD. was last trading in BSE at Rs.3175.05 as compared to the previous close of Rs. 3120.35. The total number of shares traded during the day was 253600 in over 18332 trades.

The stock hit an intraday high of Rs. 3224 and intraday low of 3147.45. The net turnover during the day was Rs. 804977931.

Source : Equity Bulls

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