Tata Consultancy Services' Q3FY19 results (Outperformer) - Strong deal momentum continues
Q3FY19 result highlights
- Inline revenues, margin miss: Revenues of $ 5,250mn (IDFCe: $5,294mn), growth of 0.7%/9.7% qoq/yoy. Constant currency (cc) revenues up 1.8% qoq (IDFCe: 2.0%) and 12.1 % yoy. EBIT margins came in at 25.6% (IDFCe: 26.7%), down 90 bps qoq. EPS of Rs21.1 (IDFCe: Rs21.5), a growth of 2.6%/24.1% qoq/yoy.
- Strong growth momentum maintained in digital, BFSI & US geography: TCS posted a strong growth in digital business, 52.7% yoy cc. Digital now contributes to 30.1% of total revenues. Management indicated that deal sizes are growing and are seeing greater wins in the digital space. Management mentioned that growth is accelerating in BFSI(+8.1% YoY CC) & clients spends are increasing in new technologies in banking sector.
- Strong Deal momentum to give a good start to CY19: Total Contract Value(TCV) of $ 5.9bn in Q3FY19 as compared to$4.9bn in Q2FY19 (+20% QoQ) gives TCS a strong growth momentum to continue in CY19. Management has seen improved performance among BFSI clients and remains confident that the clients spending can further improve. Management sees very good demand and pipeline today and is not seeing any indecision/delays on the part of clients despite the stiffening macro headwinds and softening global growth.
Key positives: Strong growth in Digital & BFSI vertical.
Key negatives: Miss on EBIT margins.
Impact on financials: FY19E/FY20E/FY21E EPS unchanged.
Valuations & View
We believe TCS will have a remarkable CY19 led by – i) Strong recovery in BFSI segment, ii) industrialization of digital technologies & iii) Strong Deal pipeline. TCS does well stitching together complex integrated digital deals involving multiple technologies, which plays to its advantage as the theme of the industrialization of digital gains currency. TCS broad-suite of competencies and investments helps in capturing this large spends. Strong order book & deal pipeline gives good visibility to TCS for CY19. 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).
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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