MOSL: TCS (Neutral)-Missing revenue traction weighs on profitability too

​TCS: Missing revenue traction weighs on profitability too

(TCS IN, Mkt Cap USD74.7b, CMP INR2444, TP INR2350, 4% Downside, Neutral)

• Growth missing large-segment traction: TCS' 6.3% YoY CC growth in 1QFY18 was marginally below our estimate of 6.9%. YoY CC growth in larger revenue contributors remained soft - BFSI (5%), Retail (-3%), North America (3.5%) and the UK (6%). This, in our view, implies elevated challenges to exceed 8% YoY CC growth of FY17 in this fiscal. We estimate 7.5% CC growth in FY18.
  
• Farthest from aspired margin band (ex-currency): While the margin pressures from wage hikes and currency were known, TCS' 240bp QoQ EBIT margin contraction (to 23.4% v/s estimate 24.3%) in 1QFY18 implied very limited results from any offsetting levers. While TCS retained its confidence of operating in the 26-28% EBIT margin band ex-currency, 1Q margin adjusted for currencies was ~24.5%, the farthest from the band in recent history. This drives additional 40bp cut in our EBIT margin estimate for FY18 to 24.8%. 1QFY18 PAT declined 10% QoQ to INR59.45b, below our estimate of INR62b, mainly led by miss on the operating performance.
  
• BFS and Retail continue to drag: TCS won four large deals in BFSI in 1QFY18 out of 11 in total, but cited that the pipeline remains short of suggesting homogenous strength in the vertical. Client-specific concerns are driving the same. Retail grew 2% QoQ CC driven by Digital, but the segment is still under the scanner, given the structural challenges facing many retailers.