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Elara Capital
TCS (Accumulate)
CMP: ₹2,107.7
Target: ₹2,320
TCS revenue growth at 10.6 per cent y-o-y in constant currency (CC) terms was lower than our estimates of 11.0 per cent y-o-y. However, we are enthused BFSI continued to accelerate at 9.2 per cent y-o-y in CC terms in Q1FY20 despite management comments on headwinds in sub-segments, such as Europe banks and US markets. The regional markets and other segments were up 16.9 per cent y-o-y in CC terms, led by continued ramp-up of contracts with Transamerica (announced January 11, 2018) and M&G Prudential (announced June 12, 2018); management said the Transamerica deal’s transformation component is still being executed. Deal wins in Q1FY20 remain healthy at $5.7 billion versus $4.9 billion in Q1FY19 while book-to-bill ratio remains constant at 1.0x.
Valuation: Given TCS now enjoys 24 per cent FY21E P/E premium versus Infosys, we revise our rating to Accumulate from Buy despite structurally lower execution risk with trainee on-boarding flexibility. We lower our revenue by 3.9 per cent for FY20E and by 3.8 per cent for FY21E as we change our dollar-rupee assumption for FY20E to 70.7 from 71.9. We decrease EBITDA margin by 30 bps for FY20E, but raise it 74bp for FY21E, factoring in lease accounting change and higher trainee proportion.
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