Tata Consultancy Services' Q2FY19 results (Outperformer) - CC revenue beat missing

Q2FY19 result highlights

• Good business execution but CC beat missing: Revenues of $5,215mn (IDFCe: $5,146mn), growth of 3.2%/10% qoq/yoy. Constant currency (cc) revenues up 3.7% qoq (IDFCe: 3.5%) and 11.5 % yoy. EBIT margins came in at 26.5% (IDFCe: 26.3%), up 148 bps qoq. EPS of Rs20.6 (IDFCe: Rs20.5), a growth of 7.6%/22.6% qoq/yoy.
• Strong growth in digital, BFSI recovers: TCS posted a strong growth in digital business, a revenue growth of 16.5% qoq & 60% yoy cc. Digital now contributes to 28% of total revenues. Management indicated that deal sizes are growing and are seeing greater wins in the digital space. BFSI (+3.5% QoQ CC) and North America growth (2.6% 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 mentioned that Q2FY19 TCV is $4.9bn, BFSI is $1.5bn, $700mn in retail & North America accounts to $2.4bn.

Key positives: Strong growth in Digital with stable margin outlook.

Key negatives: Soft MEA and India growth

Impact on financials: FY19E/FY20E/FY21E EPS unchanged.

Valuations & View

A mixed quarter from TCS with business metrics tracking well but CC revenue beat was missing. Although stock has corrected, we think that earnings delivery is keeping pace with expectations. With INR deprecation, there is greater confidence on the margin outlook. 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 relative to the sector. Maintain Outperformer with unchanged Dec 2019 target price to Rs2200 (set at 22.5x PE).