MOSL: TCS (Neutral)-Deal win, BFSI acceleration suggest intact momentum
TCS: Deal win, BFSI acceleration suggest intact momentum
(TCS IN, Mkt Cap USD109.1b, CMP INR2014, TP INR2010, 0% Downside, Neutral)
- Strong exit to the year: TCS ended FY19 with full-year constant currency (CC) revenue growth of 11.4% YoY, EBIT margin of 25.6% (+80bp YoY) and net income growth of 22.5% YoY. In FY19, TCS paid out 93% of its free cash flows to shareholders via dividends/buybacks. For 4QFY19, revenue in CC grew 12.7% YoY (in line), EBIT margin shrank 50bp QoQ to 25.1% (in line after adj. for 60bp one-off) and net income at INR81.3b grew 17.7% YoY – a 3.6% beat due to INR3.4b forex gains.
- Deal wins lend visibility going into FY20: TCS signed USD6.2b worth of deals in total contract value (TCS) in 4Q, making it the strongest quarter in FY19 on that front. This lends visibility going into FY20, at least for the earlier part of the year, when TCS should continue reporting growth in double digits, with the macro holding up.
- BFSI was strong, but commentary mixed: In terms of segments, double-digit growth in BFSI (11.6% YoY CC) during the quarter was a key positive. However, TCS cited that there are clients which have been actively spending and then others which have been pockets of weakness within the vertical. Similarly clouded was the outlook on Retail from the near-term (FY20) perspective, while expectations over the medium term remain robust.
- Valuation view: With a book-to-bill of 1.05:1, the outlook for robust growth may come under some suspicion, but being only the first year of deal size disclosures without any historical precedence, we would refrain from drawing conclusions immediately. We model 10% CC revenue CAGR for TCS over FY19-21. Our EBIT margin estimate for FY20/21 stands at 25.5%/25.7% (down 20/10bp). However, our earnings estimates are higher by ~2% due to marginally better expectation on revenue and adjustments to expectations on other income. TCS trades at 22.4x/20x FY20/21 earnings. Our TP of INR2,010 discounts forward earnings by 20x. Valuations keep us Neutral on TCS. We will treat any incremental weakness in the stock as an opportunity to buy.
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