EUR 850.00 For Business Accounts Only

Morningstar | TCS Posts Another Healthy Quarter; Digital, Forex Help Buoy Reported Results; Shares at Premium

Tata Consultancy Services continued to feel the effect of a strong foreign exchange tailwind as it reported strong third-quarter revenue growth of 20.8% on a year-over-year basis. Even excluding the forex effect, TCS reported very healthy top-line growth of 12.1%, supported by its surging digital business. For the quarter, digital revenue constituted 30.1% of total revenue and rose 52.7% year over year on a constant-currency basis. We believe TCS has a good position in the digital transformation market, and we remain confident in the firm’s ability to attract and retain clients. To that end, we are encouraged by the company’s client metrics, which illustrated eight additional clients in the $100 million-plus revenue band and five more clients in the $50 million revenue band year over year. Such client growth helps to support our confidence in TCS’ land-and-expand strategy and its embedded nature in large multinational customers. After the quarter, our outlook for TCS remains intact and we reiterate our INR 1,480 fair value estimate and narrow economic moat rating. With the shares trading at a premium, we’d seek a wider margin of safety before investing new capital in the name.

For the quarter, reported revenue rose 20.8% year over year to INR 373 billion (12.1% in constant currency). As in the second quarter, management said it sees continued recovery in the important banking, financial services, and insurance business (31% of group revenue), which we expect to help buoy TCS’ revenue growth rate for at least the short term. While some macroeconomic factors are being considered as potential negative headwinds, TCS sees little impact at this stage and highlighted a healthy pipeline of business for which it continues to hire aggressively. To that end, we did see an uptick in the company’s employee costs.

TCS’ operating margin expanded 40 basis points year over year to 25.6% but declined 90 basis points sequentially. The sequential decline was largely blamed on the higher cost of doing business in major markets in the quarter. Nevertheless, the firm’s operating margin was within our expectations, and our margin outlook for the year is unchanged.