ICICI Securities has given Hold recommendation for Tata Consultancy Services with a target price of Rs. 3519 in its research report issued on Apr 12, 2022

ICICI Securities research report on Tata Consultancy Services

Tata Consultancy Services (TCS) reported revenue growth of 2.6% QoQ USD terms (3.2%QoQ CC) and margins of 25% in line with our estimates. Revenue growth was broad-based across verticals with communications, BFSI and retail leading the growth. TCV was strong at US$11.3bn (all-time high) growing 49% QoQ and 23% YoY- partly aided by two mega-deals of ~US$1 bn each. Company benefited on margins from reduction in travel costs in Q4FY22 (down from 0.94% of revenue to 0.50%). Apart from travel costs, every cost item moved up for TCS during the quarter. We believe these costs will further increase as companies may plan to return workers to offices (travel, facility, communications). Though TCS has better-than-peers’ supply-side management, upcoming salary hikes, retention costs and wage inflation will add to the headwinds on margins. We would like to highlight that employee addition remained strong (+35k) in Q4 with average of 23k in past three quarters, which still showcases strength in demand. Attrition rate on ltm basis increased further to 17.4%, an increase of 210 bps QoQ and 1,020 bps YoY. Demand remains democratic in nature, but its fulfilment will come at a cost, which will further dampen the earnings momentum. Talent shortage will continue even as the IT industry has added a record number of freshers. High cost to backfill attrition and retain talent will leak into margins across companies. Talent constraint exists not only offshore, but onsite as well. Tailwinds will be backended & headwinds will be upfront.

Outlook

We are forecasting revenue growth of 11.2%/10.1% and margins of 24.8%/25% for FY23E/FY24E respectively. TCS has better-than-peers’ supply-side management, breadth of capabilities and deep domain capabilities, but the stock is trading at 28.3x on FY24EPS with PEG of 2.4x – this leaves limited room for upside. We reiterate our HOLD rating on account of slowing earning growth and elevated PEG ratios with a fair value of Rs3,519 based on 27x FY24E earnings. Our estimates remain intact.

More Info

At 17:30 Tata Consultancy Services was quoting at Rs 3,691.45, down Rs 4.95, or 0.13 percent.

It has touched an intraday high of Rs 3,738.60 and an intraday low of Rs 3,650.05.

It was trading with volumes of 283,042 shares, compared to its thirty day average of 113,927 shares, an increase of 148.44 percent.

In the previous trading session, the share closed up 0.26 percent or Rs 9.55 at Rs 3,696.40.

The share touched its 52-week high Rs 4,045.50 and 52-week low Rs 3,004.80 on 18 January, 2022 and 03 May, 2021, respectively.

Currently, it is trading 8.75 percent below its 52-week high and 22.85 percent above its 52-week low.

Market capitalisation stands at Rs 1,365,486.32 crore.

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