EUR 120.00 For Business Accounts Only

MOSL: TCS (Neutral)-Near-term headwinds to continue

(TCS IN, Mkt Cap USD117.1b, CMP INR2218, TP INR2320, 5% Upside, Neutral)

Weak growth; healthy margin expansion; soft outlook
** In a seasonally soft quarter, TCS reported weak growth (~0.3% QoQ, CC) dragged by key segments like BFSI and US. Reported deal wins ex Phoenix (up ~2% YoY in 3Q) were not encouraging. Near-term outlook was soft due to overhang in areas like large banks/retailers in the US and banks in the UK.

** Our estimates over FY20-22E remain largely unchanged. We continue liking TCS for its gold standard capital allocation, industry leading execution capabilities and high-quality management team. However, the soft outlook and rich multiples (~23x FY21 EPS) may limit the potential upside.

Decline in key segments; Utilization-led margin improvement
** Revenue grew 6.8% YoY CC (our estimate: 6.4%) in 3QFY20. EBIT increased 4.4% YoY (our estimate: 3.7%) and PAT was flat YoY (our estimate: ~2%).

** Among verticals, growth was largely driven by Life Sciences & Healthcare (17% YoY CC), Communications & Media (~10% YoY CC) and Manufacturing (~9% YoY CC). Key verticals like BFSI (~5% YoY CC) continued to be soft.

** While North America (~4% YoY CC) remained soft, growth was led by continental Europe (16% YoY CC).

** EBIT margin was largely in line with our estimate. It expanded 100bp QoQ, largely driven by utilization and other operational levers.

** The marginal PAT miss was due to lower than expected forex gain.

** Deal win TCV in 3Q stood at USD6b (2% YoY). However, this does not include the large deal from Phoenix Group due to pending regulatory approvals.

** Attrition (LTM) reported a slight increase (~60 bp QoQ) to ~12.2%.