Tata Consultancy Services' Q3FY18 results (Outperformer) - Inline quarter- Retail outlook improves, BFSI muted
Q3FY18 result highlights
- Inline quarter: Revenue of US$4787m (+1.0%/+9.1% QoQ/YoY in USD terms and +1.3% in QoQ CC terms) was in line with our expectations (IDFCe: US$4,786m). EBIT margin expanded by 10bp sequentially to 25.2% (IDFCe:25.3%) driven by G&A efficiency and stricter cost control. EPS at Rs.34.1 (IDFCe: Rs34.81), +1.3%/(0.8%) QoQ/YoY growth.
- Strong growth in digital & rebound in retail: TCS posted a strong growth in digital business, posted a revenue growth of 13.9% QoQ & 39.6% YoY, contributes to 22.1% of the sales. Management indicated that deal sizes are growing and are seeing greater wins in the space. Retail showed a strong rebound with growth of 6.4% QoQ CC growth and 3% YoY CC growth. Energy & Utilities was top performer with 8.5% QoQ CC growth. BFSI posted a negative growth of 1.5% QoQ CC growth, impacted by seasonality.
- Retail to show growth, BFSI recovery to take time: BFSI and Retail have been two drag verticals, and we note that TCS expects retail to return to double digit growth. However BFSI recovery is expected to take some more time, particularly among US banks, as they make decision on technology stack selection for their business transformation. That said, TCS management indicated that they haven’t lost market share.
Key positives: Strong growth in Retail vertical with positive outlook.
Key negatives: US banks remain a drag on BFSI performance
Impact on financials: Estimates largely unchanged
Valuations & view
Overall an inline quarter from TCS but commentary was mixed, with management indicating BFSI softness but recovery in retail. While near-term, BFSI will be a drag, we do see one of the cyclical drag verticals (Retail) returning to growth. As it is, our base case for growth recovery is FY20E and thus we don’t see any changes to our estimates. Management hasn’t quantified the impact of BEAT provision tax. We retain our US$ revenue growth and Rs-EPS estimates and our Mar 2019E target price of Rs2950, based on 18x FY20E EPS. Retain Outperformer.
Tata Consultancy Services provide consulting-led integrated portfolio of information technology (IT) and IT-enabled services delivered through a network of multiple locations around the globe. Co.'s full services portfolio consists of IT and Assurance Services, Business Intelligence and Performance Management, Business Process Services, Cloud Services, Connected Marketing Solutions, Consulting, Eco-sustainability Services, Engineering and Industrial Services, Enterprise Security and Risk Management, Enterprise Solutions, iON -Small and Medium Businesses, IT Infrastructure Services, Mobility Products and Services and Platform Solutions.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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