Tata Consultancy Services (TCS)

CMP: | 3257 Target: | 3800 (17%) Target Period: 12 months BUY

July 9, 2021 Healthy deal wins a key positive…

About the stock: Tata Consultancy Services (TCS) is one of the leading IT service Particulars providers with a presence in BFSI, Communication, Manufacturing, Retail & Hi Tech. Particular Amount  Consistent organic revenue growth and industry leading margins (>25%) Market Capitalization (| Crore) 12,21,375.0 Total Debt (| Crore) 7,795.0  Stable management, robust return ratios (>RoCE 40%) & payouts (~70%) Cash and equivalents (| Crore) 38,489.0 EV (| Crore) 11,90,681.0

52 week H/L 3399/ 2126 Update Result Q1FY22 Results: TCS reported Q1FY22 results. Equity capital (| Crore) 370 Face value | 1  US$ revenues grew 2.4% QoQ to $6,154million

 EBIT margins declined 133 bps QoQ to 25.5% Shareholding pattern Jun-20 Sep-20 Dec-20 Mar-21  The company’s deal pipeline continues to be healthy at US$8.1 billion Promoters 72.1 72.05 72.1 72.2 FII 15.9 16 15.9 15.6 DII 8.0 7.85 7.71 7.83 Others 4.08 4.10 4.36 4.36 What should investors do? TCS share price has grown by ~3x over the past five

years (from ~| 1200 in July 2016 to ~| 3,257 levels in Jul 2021) Price Chart  We continue to remain positive and retain our BUY rating on the stock

Target Price and Valuation: We value TCS at | 3800 i.e. 30x P/E on FY23E EPS 19,000 5,000 17,000 4,000 15,000 13,000 3,000 11,000 2,000 Key triggers for future price performance: 9,000 7,000 1,000 5,000 0

 TCS is key beneficiary multi-year growth (15-20%) in digital technologies

Jun-18 Jun-19 Jun-21 Jun-20

Sep-18 Sep-19 Sep-20

Dec-19 Dec-20 Dec-18

Mar-19 Mar-21  Increase in outsourcing in Europe, vendor consolidation and deal pipeline Mar-20 leading to revenue CAGR of 13% over FY21-23E Nifty (L.H.S) Price (R.H.S)

 Industry leading margins to continue expect margins to improve 142 bps Research Equity Retail

over FY21-23E Recent Event & Key risks –

 Double-digit return ratios, strong cash generation and healthy payout  Deal pipeline up 17.4% YoY

 Key Risk: (i) Muted demand prospects, (ii) dip in margins Alternate Stock Idea: Apart from TCS, in our auto coverage we also like Infosys. Research Analyst  Improving revenue growth, narrowing margins with industry leader and Devang Bhatt Securities ICICI healthy payout [email protected]

 BUY with target price of | 1,650

Key Financial Summary s

5 year CAGR 2 year CAGR Financials FY19 FY20 FY21 FY22E FY23E (FY16-21) (FY21-23E)

Net Sales 1,46,463 1,56,949 1,64,177 8.6% 1,87,669 2,14,157 14.2% EBITDA 39,506 42,110 46,546 8.7% 54,612 63,605 16.9% EBITDA Margins (%) 27.0 26.8 28.4 29.1 29.7 Net Profit 31,472 32,340 32,430 6.0% 40,106 47,085 20.5% EPS (|) 83.8 86.2 86.7 108.3 127.2 P/E 38.7 37.7 37.1 30.0 25.6 RoNW (%) 34.4 38.4 37.5 43.0 45.3 RoCE (%) 43.8 44.4 45.9 50.9 54.0

Source: Company, ICICI Direct Research Result Update | Tata Consultancy Services ICICI Direct Research

Key takeaways of the recent quarter & conference call highlights Q1FY22 Results: Expect double digit revenue growth to continue  The current quarter was impacted by India revenues. We expect a gradual recovery in revenues in coming quarters  Demand in core transformation services and traction in digital tech like cloud, supply chain, M&A & customer experience are other key drivers  Robust addition across client bucket. Added two clients in $100 mn bucket and four in US$50 representing healthy client mining  Of the total TCV, North America accounted for US$3.5 billion among geographies while vertically US$1.5 billion in retail  The company is seeing healthy traction in manufacturing, retail and outsourcing in Europe

Q1FY22 Earnings Conference Call highlights

 Going forward, the company believes it will see growth from both transformational and efficiency & productivity led deals  The company is seeing multi-year opportunity led by technology refresh, vendor consolidation, transformational projects and higher outsourcing  Considering opportunities in cloud and ancillary technologies around cloud, the company could register double digit growth in FY22E  The company has multiple levers to drive margins like utilisation, productivity improvement, savings due to Secured Borderless Workspace (SBWS), automation and revenue growth. Hence, we expect TCS to register healthy margin improvement of ~142 bps to 27.3% over FY21-23E

 Deal TCV was at US$8.1 billion, up 17.4% YoY. The company has seen healthy mix of deals of small & large deals  Attrition in IT services increased 140 bps QoQ to 8.6% (LTM). There was an increase of 20,409 employees in this quarter. Employee strength was at 509,058 at the end of Q1FY22. The company’s robust hiring will enable it to tackle talent side crunch

Peer comparison

Exhibit 1: Peer Comparison EPS (|) P/E (x) RoCE (%) RoE (%)

Source: Company, ICICI Direct Research We believe TCS deserves premium valuation (trades at >1.4x its large cap peers) due to its far superior return ratios with RoE at ~45% vs. ~20-30% at its peers

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Exhibit 2: Variance Analysis Q1FY22 Q1FY22E Q1FY21 YoY (%) Q4FY21 QoQ (%) Comments Revenues in dollar terms increased 2.4% QoQ led Revenue 45,411 46,043 38,322 18.5 43,705 3.9 by healthy growth across geographies except India Employee expenses 26,240 26,981 22,486 16.7 24,860 5.6

Gross Margin 19,171 19,062 15,836 21.1 18,845 1.7 Gross margin (%) 42.2 41.4 41.3 89 bps 43.1 -90 bps SG&A expenses 6,507 6,078 5,811 12.0 6,044 7.7

EBITDA 12,664 12,984 10,025 26.3 12,801 -1.1 EBITDA Margin (%) 27.9 28.2 26.2 173 bps 29.3 -140 bps Depreciation 1,076 1,093 977 10.1 1,067 0.8 EBIT 11,588 11,891 9,048 28.1 11,734 -1.2

Operating margin in the quarter was impacted by wage hikes (170 bps) and increase in travel & EBIT Margin (%) 25.5 25.8 23.6 191 bps 26.8 -133 bps other discretionary spends partially offset by rupee depreciation

Other income (less interest) 575 813 456 26.1 793 -27.5 PBT 12,163 12,704 9,504 28.0 12,527 -2.9 Tax paid 3,132 3,151 2,455 27.6 3,245 -3.5 Reported PAT 9,008 9,513 7,008 28.5 9,246 -2.6 PAT was below our estimate due to lower-than- Adjusted PAT 9,008 9,513 7,008 28.5 9,246 -2.6 expected operating margins

Source: Company, ICICI Direct Research Exhibit 3: Change in estimates FY22E FY23E Comments (| Crore) Old New % Change old New % Change

We revise FY22E and FY23E revenue Revenue 189,437 187,669 -0.9 217,012 214,157 -1.3 estimates downwards factoring in lower than expected rupee depreciation

EBIT 50,580 50,108 -0.9 59,244 58,465 -1.3

We expect margins to stabilise at 27.3% in EBIT Margin (%) 26.7 26.7 0 bps 27.3 27.3 0 bps FY23E

PAT 40,461 40,106 -0.9 47,671 47,085 -1.2 EPS (|) 109.3 108.3 -0.9 128.7 127.2 -1.2

Source: Company, ICICI Direct Research

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Key Metrics

Exhibit 4: Geography wise break-up Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Revenue by geography (%) North America 51.4 49.9 49.1 48.6 49.8 Latin America 1.7 1.7 1.7 1.6 1.7 UK 15.3 15.5 15.7 16.0 15.6 Continental Europe 15.6 16.3 16.2 16.8 16.2 India 4.3 5.0 5.6 5.6 5.1 Growth happened across geographies except India Asia Pacific 9.8 9.7 9.7 9.4 9.7 MEA 1.9 1.9 2.0 2.0 2.0

Growth QoQ (%) North America -5.0 4.1 3.4 4.0 4.4 Latin America -12.2 7.2 5.1 -1.1 2.8 UK -11.1 8.6 6.5 7.0 4.7 Continental Europe -4.6 12.0 4.5 8.9 2.1 India -27.3 24.7 17.7 5.0 -15.6 Asia Pacific -2.1 6.1 5.1 1.8 1.7 MEA -7.1 7.2 10.7 5.0 7.9

Source: Company, ICICI Direct Research

Exhibit 5: Vertical wise break-up Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Revenue by verticals (%) BFSI 31.5 31.9 31.3 32.2 31.7 Retail & CPG 14.0 14.6 14.5 14.5 14.4 Communication and Media 6.9 6.5 6.6 6.5 6.6 Broad based growth across verticals except regional Manufacturing 9.7 9.4 9.6 9.7 9.6 markets Life Sciences & Healthcare 9.6 9.8 9.8 9.6 9.7 Technology & services 9.1 8.9 8.6 8.4 8.8 Regional markets & others 19.2 18.9 19.6 19.1 19.2

Growth QoQ (%) BFSI -1.4 8.6 3.1 8.1 3.7 Retail & CPG -15.5 11.8 4.4 5.0 4.9 Communication and Media -10.9 1.0 6.7 3.4 1.2 Manufacturing -10.8 3.9 7.4 6.1 8.1 Life Sciences & Healthcare 1.4 9.4 5.1 2.9 4.9 Technology & services -2.8 4.9 1.6 2.6 5.2 Regional markets & others -11.2 5.5 9.0 2.4 -4.8

Source: Company, ICICI Direct Research

Exhibit 6: Client & human resource matrix Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Client metrics Attrition witnessed an increase in the quarter USD 1 mn+ clients 1066 1076 1077 1096 1096 USD 5 mn+ clients 564 565 565 569 569 USD 10 mn+ clients 382 386 386 387 387 USD 20 mn+ clients 230 228 229 228 228 USD 50 mn+ clients 100 97 97 101 101 USD 100 mn+ clients 48 49 48 48 48

Headcount, Attrition Total Employees 443676 453540 469261 488649 488649 Attrition, LTM (IT Services) 11.1 8.9 7.6 7.2 8.7

Source: Company, ICICI Direct Research

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Financial summary

Exhibit 7: Profit and loss statement | crore Exhibit 8: Cash flow statement | crore (Year-end March) FY20 FY21 FY22E FY23E (Year-end March) FY20 FY21 FY22E FY23E Total operating Income 1,56,949 1,64,177 1,87,669 2,14,157 Profit before Tax 42,248 44,978 53,507 62,788 Growth (%) 7.2 4.6 14.3 14.1 Add: Depreciation 3,529 4,065 4,504 5,140 COGS (employee expenses) 89,635 94,053 1,05,845 1,19,499 (Inc)/dec in Current Assets -7,125 -1,766 3,592 -3,838 S,G&A expenses 25,204 23,578 27,212 31,053 Inc/(dec) in CL and Provisions 2,625 2,629 2,780 7,997 Total Operating Expenditure 1,14,839 1,17,631 1,33,057 1,50,552 Taxes paid 3,955 -2,106 -13,270 -15,571 EBITDA 42,110 46,546 54,612 63,605 CF from operating activities 32,369 38,802 48,177 52,655 Growth (%) 6.6 10.5 17.3 16.5 (Inc)/dec in Investments 7,916 -7,728 -493 -556 Depreciation 3,530 4,065 4,504 5,140 (Inc)/dec in Fixed Assets -3,088 -3,139 -3,753 -4,283 Other Income less interest 3,668 2,497 3,400 4,323 Others 3,737 2,738 2,937 3,860 PBT 42,248 44,978 53,507 62,788 CF from investing activities 8,565 -8,129 -1,310 -979 Total Tax 9,801 11,198 13,270 15,571 Inc/(dec) in loan funds 0 0 0 0 Minority Interest 107 132 132 132 Dividend paid & dividend tax -37,634 -30,576 -33,317 -36,279 Others -1,219 -722 0 0 PAT 32,340 32,430 40,106 47,085 CF from financing activities -39,915 -32,634 -33,317 -36,279 Growth (%) 2.8 0.3 23.7 17.4 Net Cash flow 1,019 -1,961 13,549 15,397 EPS (|) 86.2 86.7 108.3 127.2 Exchange difference 0 0 0 0 PAT 32,340 32,430 40,106 47,085 Opening Cash 7,224 9,666 7,705 22,878 EPS - Reported (|) 86.2 86.7 108.3 127.2 Closing cash and Bank 9,666 7,705 22,878 38,275

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 9: Balance sheet | crore Exhibit 10: Key ratios | crore (Year-end March) FY20 FY21 FY22E FY23E (Year-end March) FY20 FY21 FY22E FY23E Liabilities Per share data (|) Equity Capital 375 370 370 370 Adjusted EPS (Diluted) 86.2 86.7 108.3 127.2 Reserve and Surplus 83,751 86,063 92,851 1,03,657 BV per share 224.3 233.6 251.9 281.2 Share Premium 0 0 0 0 DPS 85.0 21.0 90.0 98.0 Total Shareholders funds 84,126 86,433 93,221 1,04,027 Cash Per Share 25.8 25.2 61.8 103.4 Total debt 8,174 7,795 7,980 8,188 Operating Ratios (%) Other liabilities & Provisions 1,405 2,226 2,333 2,454 EBIT margins 24.6 25.9 26.7 27.3 Deferred tax liability(net) 779 767 767 767 PBT Margins 26.9 27.4 28.5 29.3 Minority Interest / Others 623 675 807 939 PAT Margin 20.6 19.8 21.4 22.0 Total Liabilities 95,107 97,896 1,05,108 1,16,375 Debtor days 71 67 67 67 Creditor days 16 17 17 17 Assets Return Ratios (%) Net assets & CWIP 20,124 20,149 19,398 18,542 RoE 38.4 37.5 43.0 45.3 Goodwill 1,710 1,798 1,798 1,798 RoCE 44.4 45.9 50.9 54.0 Other non current assets 8,430 9,204 9,697 10,253 RoIC 65.1 71.5 94.4 119.5 Debtors 30,606 30,134 34,446 39,308 Valuation Ratios (x) Loans and Advances 8,483 11,491 13,135 10,708 P/E 37.7 37.1 30.0 25.6 Other Current Assets 15,740 19,494 9,946 11,350 EV / Net Sales 7.6 7.3 6.3 5.4 Current Investments 26,140 29,160 29,160 29,160 Market Cap / Sales 7.8 7.4 6.5 5.7 Cash 9,666 9,329 22,878 38,275 Solvency Ratios Trade Payable 6,740 7,860 8,985 10,253 Debt / EBITDA 0.2 0.2 0.1 0.1 OCL & Provisions 19,052 25,003 26,367 32,766 Debt / Equity 0.1 0.1 0.1 0.1 Application of Funds 95,107 97,896 1,05,108 1,16,375 Current Ratio 2.1 1.9 1.6 1.4

Source: Company, ICICI Direct Research Quick Ratio 2.1 1.9 1.6 1.4

Source: Company, ICICI Direct Research

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Exhibit 11: ICICI Direct coverage universe (IT) EPS (|) P/E (x) RoCE (%) RoE (%)

Company Cmp (|) TP (|) Rating Mcap (| Cr) FY20 FY21 FY22E FY23E FY21 FY22 FY23 FY20 FY21 FY22E FY23E FY20 FY21 FY20 FY22E FY23E E E HCL Tech (HCLTEC) 977 1,110 Buy 2,65,034 40.8 45.8 52.3 60.9 24 21 19 16 23.0 23.5 24.7 25.5 21.6 20.8 21.0 21.2 Infosys (INFTEC) 1,560 1,650 Buy 6,64,495 38.9 45.6 55.1 64.2 40 34 28 24 30.8 31.7 34.1 36.9 25.2 25.2 27.9 30.2 TCS (TCS) 3,257 3,800 Buy 12,21,375 86.2 86.7 108.3 127.2 38 38 30 26 44.4 45.9 50.9 54.0 38.4 37.5 43.0 45.3 Tech M (TECMAH) 1,060 1,120 Buy 1,02,551 59.5 50.2 60.1 70.2 18 21 18 15 18.3 19.8 21.2 22.5 17.5 17.8 19.1 19.9 Wipro (WIPRO) 531 530 Hold 2,91,097 16.6 19.1 21.6 26.0 32 28 25 20 19.3 21.3 22.6 27.0 17.4 19.5 22.1 26.6 Mindtree (MINCON) 2,522 2,390 Hold 41,567 38.3 67.4 79.8 94.0 66 37 32 27 23.0 32.5 32.6 32.6 20.0 25.7 25.5 25.3 LTI (LTINFC) 4,043 4,580 Buy 70,640 86.6 110.3 130.5 151.6 47 37 31 27 30.7 31.9 32.1 31.7 28.1 26.5 26.6 26.2 Coforge (NIITEC) 4,464 3,985 Buy 27,053 71.4 73.3 109.0 131.0 63 61 41 34 23.0 23.6 27.6 28.6 18.5 19.2 24.7 25.5 Infoedge (INFEDG) 5,378 5,740 Buy 69,152 26.8 21.2 33.3 47.1 201 254 162 114 18.0 7.7 12.4 16.2 13.5 6.0 9.3 12.2 Teamlease (TEASER) 3,765 4,205 Buy 6,437 20.5 45.3 58.8 92.6 184 83 64 41 15.0 14.2 14.3 18.5 6.5 11.6 13.8 18.0

Source: Company, ICICI Direct Research

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RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

ICICI Securities | Retail Research 7 Result Update | Tata Consultancy Services ICICI Direct Research

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