TCS Group - Still the Real Fintech Deal

We think the goals outlined in the recent medium-term strategy update are more than achievable for TCS, so long as it keeps its eye on the ball. Firmly placed as Russia's third-largest bank by customers, we see active users of its online ecosystem rising from 10 mln to over 17 mln by end-2023. With a broad suite of financial and lifestyle services in place, the next three years will be about building user loyalty and engagement, to be reflected in a more than doubling of revenue-generating products to 30 mln. We expect TCS to keep on growing profitably, with ROE remaining comfortably above 30% and a 2021E-23E earnings CAGR of 23% (we raise our earnings by 8-11% per year). Following new segmental disclosures, we switch to a SOTP valuation to try and better capture the upside in the non-banking businesses, which we value at $6 bln. The banking business (including insurance) remains the core element, and we see it contributing two thirds of earnings in 2023. Our new SOTP valuation derives a $72 per GDR 12-month target price, which values the stock at a P/E of 14.8 for 2022E and 12.7 for 2023E, and we keep our BUY recommendation on the shares.> Diving into the segments. Disrupting markets has long been in TCS's DNA, and its early moves in the likes of retail brokerage, SME banking and online acquiring should reap rewards over the next three years, as we see their top line contribution rising from 16% in 2020 to 24% in 2023. All of these markets have huge growth potential - Russians hold about 10% of their savings in securities, e-commerce accounts for just 9% of total Russian retail sales, and only 8% of SMEs have a loan. For sure, not all may be winners for TCS, but it has a tasty spread of bets here, and all are growing nicely and are positive bottom-line contributors. Retail brokerage stands out for us, with an impressive LTV/CAC ratio of 33, and we see its share of profit rising from 3% in 2020 to 13% in 2023, putting it alongside SME as a key non-credit contributor.> Still managing the risks. TCS will need to continue to negotiate an array of risks, from potential negative effects of higher rates on credit demand and asset quality, and a regulator eyeing PSK and ecosystems, to new fintech challengers from technology and e-commerce, and the potential distraction of TCS's impending international foray. For now, we think all these risks are manageable.> New SOTP valuation; $72 TP, BUY. We value the "banking" business (consumer finance, retail debit and insurance) on a 12.2 1y forward P/E, implying $8.2 bln equity value, and the main "non-banking" businesses (acquiring and payments, InvestTech) on 6.3/5.5 1y forward EV/S multiples for a $6.1 bln equity value. A target 12.7 2023 P/E does not feel demanding for what we see as still the real fintech deal.