Tata Consultancy Services Limited
CMP: ₹3193.05
Recommendation: Buy
Investment Horizon: 3 years
Urmi Shah – Research Analyst
Date – 31.10.2022
Outlook and view
The IT sector has been a winner over the long term and after being the heroes of the post-pandemic era the sector has given a healthy correction over the past couple of months making the earnings multiple decent for an entry. Amongst them, Tata Consultancy Services (TCS) is an attractive bet right now.
TCS’ superior execution metrics, full stack portfolio (better deal count across verticals) and industry drivers (uptick in E&U and Travel & Hospitality sub-verticals) will support growth.
An improvement in utilization, operation and realization, moderation in subcontract expenses, and a decline in attrition are key factors which will aid margin expansion in the short term.
Key Positives
Strong order book – Total Contract Value (TCV) stood at US$ 8.1 billion in Q2FY23. The average order book size which used to be in the US$ 6-7 billion range in FY 2021 moved to the US$7-8 billion range in FY 2022. The company ended with an all-time high order book of US$11.3 billion in Q4FY22. The core order book size excluding any occasional mega deal expands each year. The quality of revenue keeps rising with higher value engagements for sustained longer-term growth.
Robust financials – 5-year revenue and profit CAGR are 10% and 8% respectively. It has a RoCE of 54.9% and a RoE of 43.6%. Operating margins stood at 26.6%, the highest among the pack.
Growth in all verticals – Segment-wise growth was led by Retail and CPG (22.9%), Communications & Media (+18.7%), Manufacturing vertical (+14.5%) and Technology & Services (+15.9), BFSI grew +13.1% while Life Sciences and Healthcare grew +14.5% in Q2FY23. This indicates strong growth across business segments despite the turbulence felt by the economy.
Demand environment – Demand continues to be robust with increased spending on cloud adoption and transforming the operating system. Despite the global slowdown, tech expenses seem to be barely affected as companies realize the importance of digitalization.
Attrition peaking – the past few quarters were witnessing a hustle in the IT sector. The attrition rates peaked and led to employee cost increases to retain talent. TCS management has pointed out that the attrition rate has started to normalize which will ease the margins in the coming months.
Leadership position – Growth will be supported by TCS’ superior execution metrics, rich order portfolio (better contracts across verticals), and market drivers (increase in the E&U and Travel & Hospitality sub-verticals). TCS has a leadership position across all its verticals globally. The company will rebound higher post the easing of current tailwinds.
Key Risks
Macro headwinds – right now the company has not been facing any issues with orders but clients are being wary about longer-term projects. The recessionary environment and impacted businesses might compel customers to reduce their costs impacting the order inflow.
Cross-currency headwinds – Since January 2022, the rupee has dropped nearly 11% of its value. Even though 50 percent of TCS’s revenue is in dollars, the company also deals in other currencies. This means that cross-currency headwinds reduce the benefits of a stronger dollar.
Valuations
Cost optimization and a resilient demand environment will drive up margins. It currently trades at a PE of 28.8x much lower than its 1-year average PE of 34x. It even trades below its 3-year average PE of 32.5x making it the right time to invest in TCS.
About the company
TCS is an IT services, consulting and business solutions organization partnering with many of the world’s largest businesses in their transformational journeys for the last 54 years. It has a global presence, deep domain expertise in multiple industry verticals and a complete portfolio of offerings – grouped under consulting and service integration, application services, digital transformation services, cloud services, engineering services, cognitive business operations, and products and platforms – targeting every C-suite stakeholder.
The company leverages all these and its deep contextual knowledge of its customers’ businesses to craft unique, high-quality, high-impact solutions designed to deliver differentiated business outcomes. TCS’s geographic footprint covers North America, Latin America, the United Kingdom, Continental Europe, Asia-Pacific, India, Middle-East and Africa.
Financial snapshot:
| In. Rs. Crores | Mar-17 | Mar-18 | Mar-19 | Mar-20 | Mar-21 | Mar-22 |
| Sales | 1,17,966 | 1,23,104 | 1,46,463 | 1,56,949 | 1,64,177 | 1,91,754 |
| Expenses | 85,655 | 90,588 | 1,06,957 | 1,14,840 | 1,17,631 | 1,38,697 |
| Operating Profit | 32,311 | 32,516 | 39,506 | 42,109 | 46,546 | 53,057 |
| OPM % | 27% | 26% | 27% | 27% | 28% | 28% |
| Profit before tax | 34,513 | 34,092 | 41,563 | 42,248 | 43,760 | 51,687 |
| Net Profit | 26,357 | 25,880 | 31,562 | 32,447 | 32,562 | 38,449 |
| EPS (Rs. Per Share) | 66.71 | 67.46 | 83.87 | 86.19 | 87.67 | 104.75 |
| Employee Cost/Total Revenue | 52.20% | 53.90% | 53.40% | 54.80% | 55.90% | 56.10% |
Story in charts:
Attrition Rate Trend
(Source: Company)
Segmental Performance
The revenue break-up by Industry Vertical and Geography as of FY22 is provided below:
Geographical Segmentation
(Source: Company)
Industry Vertical
(Source: Company)
Other Details
| Particulars | Details |
| Market Cap (In Rs.) | 1,163,761 Crores |
| 52-week high/low (In Rs.) | 4,043/2,926.10 |
| CMP (28th October 2022) | Rs. 3,162.95 |
| PE | 29.14x |
Shareholding Pattern as of 30th September 2022
| Particulars | Holding (%) |
| Public | 6.06% |
| Promoters | 72.30% |
| DIIs | 8.53% |
| FIIs | 13.05% |
Price Performance Vs Nifty50
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