Tata Consultancy Services' Q1FY19 results (Outperformer) - Yet another quarter of solid execution.
Q1FY19 result highlights
- Another quarter of strong execution: Revenues of $5,051mn (IDFCe: $5,063mn), growth of 1.6%/10% qoq/yoy. Constant currency (cc) revenues up 4.1% qoq (IDFCe: 2.9%) and 9.3% yoy. EBIT margins came in at 25% (IDFCe: 24.1%), down 40bps qoq. EPS of Rs19.2 (IDFCe: Rs18), a growth of 6.3%/26% qoq/yoy.
- Strong growth in digital, BFSI recovers: TCS posted a strong growth in digital business, a revenue growth of 9% qoq & 45% yoy cc. Digital now contributes to 25% of total revenues. Management indicated that deal sizes are growing and are seeing greater wins in the digital space. BFSI (+3.7% QoQ CC) and North America growth (3.7% QoQ CC) improved and is seeing improved traction.
- BFSI outlook better: TCS expects revenue momentum to continue into FY19 with no change in target operating margin band (26-28%). Management has seen improved performance among BFSI clients and remains confident that the segment has turned the corner. TCS has also started sharing the bookings number, which was at US$4.9bn in Q1 with BFSI contributing US$1.6bn to these wins.
Key positives: Strong growth in Digital with stable margin outlook.
Key negatives: Soft MEA and India growth
Impact on financials: FY19E-FY20E EPS raised by 0.5%/0.6%
Valuations & View
A solid quarter from TCS with beat on revenues and margins. Importantly, the YoY growth acceleration in key markets and verticals is a key positive. Although stock has rallied, we think that earnings delivery is keeping pace with share price performance. Further management has reaffirmed its margin outlook and expects it to be stable with growth as lever for improvement. We continue to like TCS’s well-rounded portfolio and industry leading capability. This is reflecting in better than industry growth, which should lead to the stock sustaining premium valuations. We raise our target multiple to 23x (21x earlier) and raise our Mar 2019 target price to Rs2050 (Rs1875 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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