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MOSL: TCS (Neutral) 1QFY22: Robust core growth and deal wins to drive expansion

TCS 1QFY22: Robust core growth and deal wins to drive expansion

(TCS IN, Mkt Cap USD161.3b, CMP INR3257, TP INR3400, 4% Upside, Neutral)

 

Valuation continues to factor in performance

• Tata Consultancy Services (TCS) reported revenue growth of 2.4% QoQ CC in 1QFY22, below our estimate of 3.6%. This was primarily due to sharp de-growth in its India business (-14.1% QoQ) on account of the second COVID wave. Excluding the impact in regional markets, core business growth of 4.1% QoQ CC was broadly in-line. The EBIT margin at 25.5% (marginally above our estimates) declined 130bp QoQ, primarily due to annual wage hikes (170bp impact).
• TCS delivered another quarter of strong deal wins (USD8.1b), with a book-to-bill ratio of 1.3x, despite the absence of any mega deals. TCS has consistently reported a book-to-bill ratio above 1.0x, without support from USD500m+ deals (4QFY21 record TCV comprised just one such deal). We see this as positive for the company as it should improve growth visibility.
• Consistent performance from TCS, post the initial phase of the COVID pandemic, indicates continued strength in the tech spending environment, along with its ability to capture outsized market share. Management commentary on enterprise demand, especially cloud, implies a positive outlook for peers as well.
• We see LTM attrition increasing 140bp QoQ as an indication of elevated supply constraints in the industry and expect this to be visible in TCS' peers as well. Additionally, the company's hiring streak has continued (the highest ever net employee additions of 20.4k QoQ / 65.3k YoY), indicating a robust demand environment. It further instills the confidence that this trend would persist.
• We expect TCS to be relatively better positioned (v/s the sector) to leverage the acceleration in large deals as clients increase their spending on cloud. Backed by strong deal wins and continued momentum in the Cloud and Data spaces, we expect the company to deliver a ~15% USD growth CAGR over FY21-23E.