Tata Consultancy Services Ltd - Research Report

Private Client Research

Rating

Buy

Sector

IT - Software

Company

Tata Consultancy Services Ltd

IT - Software


March 06, 2018

Sensex: 33317.20


CNX Nifty: 10249.25

NSE: TCS


BSE: 532540

Reco Price
Rs. 3110.00
Price Target (1 Year)
Rs. 3735.00
Upside
20.10%

Date

March 06, 2018

Sensex

33317.20

CNX Nifty

10249.25

Exchange

Code

NSE

TCS

BSE

532540

Stock Data

CMP (Rs)
3042.80
Face value (Rs)
1
52 Week Range (Rs)
3259.05 - 2252.80
Market cap (Rs Crores)
583819.43
Price To Book Value (x)
7.17
P/E Ratio (x)
22.75
EV/EBIDTA (x)
16.19

One Year indexed Stock Performance

Tata Consultancy Services Ltd Sensex
Tata Consultancy Services Ltd
Return (%)
1m
6m
12m
36m
Absolute
1.82
24.15
23.44
15.39
Sensex
-2.57
5.23
14.70
15.51

Shareholders

(in %)
31-Dec
Promoter
73.57
Public
26.43
Others
0.00
Total
100

+91 22 6639 3000

research@stockaxis.com

With IT sector turning around, Sector leader is set to outperform.

Management Re-shuffle:
With Mr. Natarajan Chandrasekaran being the Chairman of Tata Sons since February 21, 2017, CFO Mr. Rajesh Gopinathan has taken charge as the CEO of the company. He started his professional career with TCS in 2001 and was appointed as the CFO in February 2013. TCS also announced N G Subramanian as the COO of the company. Thus, the new targets under the new CEO will have a bearing on the performance of the company.

Deals getting larger in Digital:
Digital remained the key growth driver, up 39.6% YoY compared to overall company’s 6.2%. TCS announced its first ever $50m+ deal in Digital, an indicator of the gradually increasing deal sizes within the segment. While 39.6% growth of the current quarter may not be tenable, TCS continues to witness deepening of Digital adoption across Enterprises.

Turnaround in Retail:
Retail has been a troubled area in recent quarters, and also saw a decline in 2QFY18, when it bottomed out. In 3QFY18, the vertical grew by 6.4% QoQ staging a comeback. While YoY growth is at 3.0%, the pick-up is expected to lead to double-digit growth in FY19. An uptick has been seen in technology spend by traditional retailers, post a strong holiday season. Visibility from recent deal wins and a better situation with offline retailers feed into the optimism.

Best-in-class operational efficiency:
Amidst severe pricing pressure that the industry has witnessed in the traditional services, TCS has managed to retain its EBIT margins upwards of 25%, and is the only company in the IT Services landscape to have managed the same. This has been a function of superior operating efficiency execution despite an employee base nearing 400,000. That said, the company has also leveraged most avenues on the margins, leaving it vulnerable to a fresh set of headwinds such as currency.

 

Industry

The IT-BPM sector in India expanded at a CAGR of 11.14 per cent to US$ 155 billion in FY17 from US$ 74 billion in FY10, which is 3–4 times higher than the global IT-BPM growth. It is estimated that the size of the industry will grow to $350 billion by 2025. India is a prominent sourcing destination across the world, accounting for approximately 55 per cent market share of the US$ 173-178 billion global services sourcing business in 2016-17.

Profile

TCS is the largest IT services company in India, with (LTM) revenue of over USD17.6b. It employs over 385,000 people and provides IT and BPO services to over 1,000 global clients. It is one of the preferred IT vendors for most Fortune 500/Global 1,000 companies.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

DESCRIPTION Mar-15 Mar-16 Mar-17 Mar-18 E Mar-19 E
Net Sales 94648.41 108646.00 117966.00 123864.30 133154.12
Growth (%) 14.80% 8.60% 5.00% 8.00%
Total Expenditure 70166.70 77969.00 85655.00 91164.12 96536.74
EBITDA 24481.71 30677.00 32311.00 32700.18 36617.38
% Margin 25.90% 28.20% 27.40% 26.40% 27.50%
Other Income 3229.91 3084.00 4221.00 3400.00 3750.00
Operating Profit 27711.62 33761.00 36532.00 36100.18 40367.38
Interest 104.19 33.00 32.00 50.00 50.00
PBDT 27607.43 33728.00 36500.00 36050.18 40317.38
Depreciation 1798.69 1888.00 1987.00 2000.00 2210.00
Profit Before Taxation & Exceptional Items 25808.74 31840.00 34513.00 34050.18 38107.38
Exceptional Income / Expenses 0.00 0.00 0.00 0.00 0.00
Tax 6238.79 7502.00 8156.00 8172.04 9145.77
Profit After Tax 19569.95 24338.00 26357.00 25878.13 28961.61
Adjusted EPS 101.35 123.18 133.41 130.99 146.59
Source: Stockaxis Research, Company Data

Valuation

With business segments reporting good growth and being the leader, we believe company would continue to post good results. We recommend a ‘Buy’ with a target price of Rs 3735 at a valuation of 25.6x its FY19E earnings