Tata Consultancy Services' Q4FY18 results (Outperformer) - Premium execution deserves premium multiple
Q4FY18 result highlights
- Another quarter of strong execution: Revenues of $4972mn (IDFCe: $4913mn), growth of 3.9%/11.7% qoq/yoy. Constant currency (cc) revenues up 2% qoq (IDFCe: 1.6%) and 7.2% yoy. EBIT margins came in at 25.4%, up 20bps qoq inline with (IDFCe:25.4%). EPS of Rs36.07 (IDFCe:Rs35.8) ,a growth of 5.7%/7.6% qoq/yoy.
- Strong growth in digital, BFSI still muted: TCS posted a strong growth in digital business, a revenue growth of 10% qoq & 42.8% yoy cc. Digital now contributes to 23.8% of total revenues. Management indicated that deal sizes are growing and are seeing greater wins in the digital space. BFSI and North America growth was muted. Energy & Utilities was top performer with 6.9% QoQ cc growth.
- Maintaining margin band, BFSI close to bottom: TCS expects revenue momentum to continue into FY19 with no change in target operating margin band. FX tailwind and better growth will be the key margin levers. Management has seen stemming of de-growth from large US BFS accounts this quarter. This, along with customer conversations, is giving TCS confidence to call a bottom in US-BFS but expect a better picture on spending trends in the vertical in Q1FY19.
Key positives: Strong growth in Digital with stable margin outlook.
Key negatives: Soft BFSI performance in Q4FY18
Impact on financials: FY19E-FY20E EPS raised by 3% each
Valuations & View
Overall a solid quarter from TCS and positive commentary with management indicating BFSI closer to bottom and recovery in retail. Further management has reaffirmed its margin outlook and expects it to be stable with growth as lever for improvement. We note despite the drag from BFSI, TCS has been accelerating growth and we do think cyclical pick up in BFSI can lead to additional upgrades. We raise our EPS estimates by ~3% for FY19E-FY20E. We think that premium execution deserves premium multiples. We raise our target multiple to 20x (18x earlier) and raise our Mar 2019 target price to Rs3425 (Rs2950 earlier). 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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