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MOSL: TCS (Neutral)-Recovery in Retail offset by muted BFS outlook and margin risks

TCS: Recovery in Retail offset by muted BFS outlook and margin risks

(TCS IN, Mkt Cap USD83.8b, CMP INR2788, TP INR2700, 3% Downside, Neutral)

• Counterbalancing forces keep us subdued: After declining for three quarters (YoY CC), Retail recovered with 3% YoY CC growth, and TCS expects this to reach double-digits in FY19, a key positive from its 3Q earnings. However, 1.5% QoQ CC decline in BFSI (flat YoY CC), and limited likelihood of this rebounding in the next few quarters offset the strength in Retail. Add to that profitability risk that current levels of INR-USD bear, and the overhang to earnings from potentially greater taxation liability arising out of BEAT, we remain subdued on the near-to-medium-term triggers for TCS.
• In-line operational performance: TCS' 3QFY18 CC revenue growth was 1.3% QoQ, marginally ahead of our estimate of +0.9%. 9M YoY CC growth stands at 6.4%, compared to 6.2% in this quarter. EBIT margin expanded 10bp QoQ to 25.2%, as against our estimate of a 20bp contraction. PAT increased 1.3% QoQ, but fell 3.6% YoY to INR65.3b (2% beat).
• Deals getting larger in Digital: Digital remained the key growth driver, up 39.6% YoY CC compared to overall company's 6.2%. TCS announced its first-ever USD50m+ deal in Digital, an indicator of the gradually increasing deal sizes within the segment. While 39.6% CC growth of the current quarter may not be tenable, TCS continues to witness deepening of Digital adoption across Enterprises.