11 JUL 2019 Result Update

TATA CONSULTANCY SERVICES

IT SERVICES
HOLD
Target Price : Rs 2,150

Q1: Strong Deal wins but sluggish growth

CMP : Rs 2,132
Tata Consultancy Services (TCS) largest IT exporter in India has witnessed strong
Potential Upside : 2%
demand but reported sluggish growth in revenue terms, TCS reported sluggish
Relative to Sector : Positive
growth of 0.4% for Q1 FY20 on QoQ basis in constant currency terms and 11.4%on
YoY basis in rupee terms at Rs. 38,172 crs. Client addition for TCS remained high
during Q1FY20 which will help to generates sustainable growth over long term. TCS
MARKET DATA
also won multiple deals across segments in Q1 FY20; total contract value (TCV) for
No. of Shares : 378.97 Cr
Q1 FY20 was healthy at $ 5.7 bn. On hiring front, employee addition remained strong
during Q1 FY20 which denotes the healthy demand outlook in medium term. FV (Rs) :1
However operating margins during the quarter have declined by 154 bps for Q1FY20 Market Cap (Rs Cr.) : 7,86,424
to 24.2% from 25.1% on sequential basis, due to cross currency headwinds, higher 52-week High / Low : Rs2,290 / Rs1,784
employee expenses and subcontracting expenses. TCS management is keen on Avg. Daily vol. (6mth) : 823,860 shares
achieving double digit growth in FY20. Bloomberg Code : TCSIN
TCS has robust business structure and leadership in the field of IT services and digital Reuters Code : TCS NS
transformation. However weaker IT spending may lower growth momentum. We BSE Code : 532540
assign 21x P/E multiple to its FY21E earnings of Rs. 102.4 per share which gives a NSE Code : TCS
target price of Rs. 2,150 per share, upside of 2%.

Key Highlights
Strong demand revival across verticals but slowdown in top line growth and higher employee cost and cross currency
headwinds drag operating margins
TCS posted weak set of results in Q1FY20, Sluggish growth was seen across verticals and across various services, During Q1FY20
IoT services, cyber security services, digital transformation services, cloud services witnessed rising demand and multiple deals
wins. Total contract value (TCV) stood at $5.7 bn during the quarter at 16% YoY growth. However higher employee cost due to local
hiring and cross currency expenses drag operating margins during the quarter. EBIT margin for Q1 FY20 stood at 24.2% lower by
154 bps from 25.1% in Q4FY19. TCS management sees good traction in demand going ahead and is likely to focus on attaining
double digit growth within the guided EBITDA margin rate of 26%-28% in the upcoming period.

FINANCIAL SUMMARY (Consolidated)

Y/E Sales EBITDA PAT EPS Change P/E RoE RoCE DPS
March (Rs Cr) (Rs Cr) (Rs Cr) (Rs) (YoY %) (x) (%) (%) (Rs)
FY18 123,104 32,532 25,826 67.1 - 21.2 30.0 34.5 39.5
FY19 146,463 39,512 31,472 83.0 24% 24.1 36.1 40.3 30.0
FY20E 160,492 43,493 34,170 91.1 10% 23.4 35.3 39.2 45.8
FY21E 177,379 48,197 37,877 102.4 12% 21.1 35.0 38.8 51.8
Source: Company, Axis Securities, CMP as on 10thJuly, 2019
PRICE PERFORMANCE
140
120
100
80
60
Jul-18 Oct-18 Jan-19 Apr-19 Jul-19
OmkarTanksale
omkar.tanksale@axissecurities.in Sensex TCS

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 11 JUL 2019 Result Update
TATA CONSULTANCY SERVICES
IT

Key Business segments showed sluggish growth

TCS showed sluggish growth in the key business verticals. For Q1 FY20, BFSI segment remained a major
contributor to the top line; it contributed around 30.8% to the top line followed by Retail& CPG (15%),
Communication &Media (6.9%), Manufacturing (9.8%) etc. BFSI segment showed marginal growth of 1.6% growth
on QoQ. However management is confident of gaining traction in forthcoming quarters as demand for the segment
remained healthy. Retail segment witnessed shift from front end to supply chain aids higher demand. The retail
vertical posted marginal growth of 1% on QoQ basis, Communication & Media segment saw 3.1% growth for Q1
FY20. Life Sciences and Healthcare segment vertical posted healthy growth of 4.3% QoQ in Q1 FY20.
On Geographical front, North America region remains a key business area and major contributor to the revenue, it
contributed around 50.6% of the total revenue. North America showed a marginal growth of 1.4% on QoQ basis. If
the momentum continues then TCS is expected to attain the desired growth momentum (double digit) in future. UK
region posted flattish growth of 1% on QoQ basis.
Key Highlights

 The management has given guidance of achieving double-digit growth. The management is also indicated
the growth momentum will be back on the track in Q2 FY19.

 The weakness in BFSI was larger than expected on account of lower spending by clients. Going forward the
outlooks remains a cautious one as European BFSI industry continues to be sluggish in the near term.
However, the Capital Market segment in the US is expected to perform better than the overall BFSI vertical.

 EBIT margins at 24.2% declined 150bps QoQ on normalized basis due to negative headwinds in the form of
salary hikes and INR appreciation. Net margins at 21.3% remained flat QoQ due to higher other income
and lower ETR (23.4% vs. 23.8% in Q4FY19).

 Deal TCV at $5.7bn in Q1FY20 ($4.9bn in Q1FY19) increased 16% YoY, of which $2.8bn came from North
America, $2bn in BFSI vertical and $1bn in Retail vertical.

 TCS indicated that its deal pipeline remains healthy. This gives it the confidence of continuing to grow in
the medium term.

 Hiring for the quarter remained high during the Q1, TCS has rolled out 30,000 offers to fresh graduates, of
which 40% have already joined and rest are expected to join by Q2FY20. TCS added 12,356 net employees in
Q1FY20. The attrition rate inched up slightly to 11.5% on an TTM (trailing twelve months) basis but still
remained low relative to peers.DSO days increased by a day to 70 days QoQ.

 TCS declared an interim dividend of Rs5/share in Q1FY20.

 TCS remains committed to return 80-100% of its FCF to shareholders, irrespective of the implementation of
the tax on share buybacks announced in the recent budget.

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TATA CONSULTANCY SERVICES
IT

Story in Charts
Geographical Revenue breakup Vertical contribution to the revenue

100% 100%
90% 90%
80% 80%
70% 70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 Q4 19 Q1 20 0%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q 19 3Q 19 Q4 19 Q4 19 Q1 20
North America (%) Latin America (%)
BFSI (%) Retail & CPG (%)
UK (%) Continental Europe (%)
Communication & Media (%) Manufacturing (%)
India (%) Asia Pacific (%)
MEA (%) Life Science & Healthcare (%) Energy & Utilities (%)
Technology & Services (%) Regional Markets & Others (%)

Source: Company, Axis Securities

Client Parameters
Addition
Q119 Q219 Q319 Q419 Q120 during the
Quarter
USD 1 mn clients 978 989 996 1008 1014 6
USD 5 mn clients 508 513 519 532 551 19
USD 10 mn clients 355 365 370 371 384 13
USD 20 mn clients 206 213 211 215 219 4
USD 50 mn clients 97 98 99 99 100 1
USD 100 mn clients 40 44 45 44 44 0

Total Headcount and attrition rate

480000 16%

400000 12%

320000 8%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q 19 4Q19 Q4 19 Q1 20
Total Headcount (in No.) Overall Attrition (%)

Source: Company, Axis Securities

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TATA CONSULTANCY SERVICES
IT

Operating Margins Revenue Growth

12,000 27% 50,000 20%

26%
40,000 16%

8,000 25%
30,000 12%

24%
20,000 8%
4,000 23%

10,000 4%
22%

0 21% 0 0%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20

Operating Income( In Crs) Operating margin (%) Revenue (In Crs) YoY growth CC terms (%)

Source: Company, Axis Securities

Rising Digital contribution Stable Bottom line growth

2,000 45%
10,000 22%
40% 22%
22%
1,600
35% 8,000 21%
21%
30%
21%
1,200
25% 6,000 21%
21%
20% 20%
800
4,000 20%
15%
20%

10% 20%
400
2,000 20%
5% 19%
19%
0 0%
0 19%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20
Digital Rev ( In $) Digal Contribution (%) Net Profit( In Crs) Net Profit Margin (%)

Source: Company, Axis Securities

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TATA CONSULTANCY SERVICES
IT

Valuations:
 TCS has robust business structure and also has pole position in the field of IT services and digital
transformation. However weaker macroeconomic factors like fear of recession, Brexit and Visa issues from
North America region may impact IT spending from clients in the forthcoming quarters. We toned our
previous estimate of FY21 from Rs. 107 to Rs.102.4. We remain cautious about the growth momentum &
assign 21x P/E multiple to its FY21E earnings of Rs. 102.4 per share which gives a target price of Rs. 2,150 per
share, upside of 2%.
TCS –12 month forward P/E Band TCS –12 month forward P/E Band

2500 27
2300 25
2100
23
1900
1700 21
1500
19
1300
1100 17
900
15
700
500 13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Jul-14

Nov-14

Jul-15

Nov-15

Jul-16

Nov-16

Jul-17

Nov-17

Jul-18

Nov-18

Jul-19
Apr-14

Jan-15
Apr-15

Jan-16
Apr-16

Jan-17
Apr-17

Jan-18
Apr-18

Jan-19
Apr-19
Jul-14
Oct-14

Jul-15
Oct-15

Jul-16
Oct-16

Jul-17
Oct-17

Jul-18
Oct-18

Jul-19

Price 12x 16x 20x 24x PE Mean Mean+1Stdev Mean-1Stdev

Source: Company, Axis Securities

Results Update
Quarterly Performance
% Change % Change
(Rs.Cr.) Q1FY20 Q4FY19 Q1FY19
(QoQ) (YoY)
Net Sales 38,172 38,010 34,261 11% 1%
Employee cost 20,809 20,179 18,548 12% 2%
As % of net sales 54.51% 53.09% 54.14% (541) 14
equipment and software licenses 511 595 613 (17)% 3%
As % of net sales 1.34% 1.57% 1.79% (18) (2)
Other operating expenses 6,815 7,162 6,029 13% 3%
As % of net sales 17.85% 18.84% 17.60% (176) (10)
Total Operating expenses 28,135 27,936 25,190 12% 3%

EBITDA 10,037 10,074 9,071 11% (1)%

EBITDA margin 26.29% 26.50% 26.48% (264) (2)
Depreciation 814 537 493
EBIT 9,223 9,537 8,578
EBIT margin 24.16% 25.09% 25.04% (0) (9)
Other Income 1,418 1,165 1,208 17%

PBT 10,641 10,702 9,786 9% 2%

PBT margin 27.88% 28.16% 28.56% (285) (3)
Tax Expenses 2,485 2,550 2,424

PAT ( before Minority Interest) 8,151 8,152 7,362 11% 2%

PAT margin 21.35% 21.45% 21.49% (215) (1)
Minority Interest 22 26 22

Net Profit for the Period 8,131 8,126 7,340 11% 4%

PAT margin 21.30% 21.38% 21.42% (214) (1)

EPS (Rs.) 21.67 21.65 19.17 13% 5%

Source: Company, Axis Securities

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TATA CONSULTANCY SERVICES
IT

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the
Regulations).

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 11 JUL 2019 Result Update
TATA CONSULTANCY SERVICES
IT

DEFINITION OF RATINGS
Ratings Expected absolute returns over 12-18 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than -10%
NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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