MOSL: TCS (Neutral)-Kick-starts the year on a strong footing

TCS: Kick-starts the year on a strong footing

(TCS IN, Mkt Cap USD109.1b, CMP INR1877, TP INR1950, 4% Upside, Neutral)

• 1QFY19 demonstrates gradual momentum pick-up: TCS' CC revenue grew 9.1% YoY (est. of 8.3%), led by the comeback of the BFSI vertical (+4.1% YoY CC v/s flattish in 4QFY18). EBIT margin shrank 40bp QoQ to 25%, bettering our expectation of 24.7%. The realized exchange rate was 67.83 (est. of 67.06). PAT of INR73b was up 6.3% QoQ (est. of +0.3%) - the beat was led in part by a better operational performance and also by higher other income. Our earnings estimates for FY19/20 are up 1.7-2.4% after the 1Q beat.
• Earnings momentum should continue into FY19: TCS' EPS grew 26.1% YoY in 1QFY19. INR revenue grew 15.8%, and EBIT margin expanded 160bp YoY (~7% YoY growth) - collectively explaining bulk of the growth in earnings. With visibility on revenue momentum, we expect earnings growth of 18.5%-22.5% in the remaining quarters, provided USD/INR sustains at current levels. This drives our estimate of 24% earnings growth in FY19.
• Comeback of sustained broad-based traction? We remain on the fence: TCS' QoQ CC growth in 1QFY19 ranged from 2.3-5.9% across its eight verticals. Such broad-based traction is reminiscent of its purple patch till FY15, when it outgrew industry. That said, we are cognizant of the role played by a spurt of large deals - spread across Insurance, Retail and Manufacturing, among others. TCS' execution remains superior, and FY19 looks in the bag. However, we wait to watch out for continuum of deal momentum before declaring double-digit growth as the new normal.