Tata Consultancy Services
IN-LINE quarter; signs of improved demand in FY19 could emerge but valuations and BFSI keep us on the sidelines; Stay N. TCS’ 3Q FY18 was in-line on revenues and margins with revenue growth at 1.3% Q/Q constant currency (CC) and EBIT margins at 25.2% (in line with consensus). Weakness in BFSI dragged down revenue performance, but this was offset by better traction in other verticals. It was particularly nice to see retail come back well. We would have liked to hear better commentary on demand recovery in BFSI (Banking, Financial services and Insurance) from management but the company still seems to be in wait-and-watch mode in this vertical (rising in-sourcing at large investment/money center banks could be causing some of this weakness). Contribution of digital as defined by TCS continues to smartly grow, now touching 22.1% of revenues (growing 39.6% Y/Y and 13.9% Q/Q). Industrialisation of digital the me hitting the inflection point in 2018/19 together with BFS comeback are two factors which may lead to improved revenue growth for TCS in FY19 by 1-2% points. That said, both these factors must materialise. Unless they do, it is difficult for us to see TCS break out of the 6-8% Y/Y CC revenue growth trajectory TCS has been in for the past 3-4 quarters.
Current valuation of 19.2x on FY19E EPS appears punchy, factoring in hopes of a demand improvement in FY19. Retain N with new Mar-19 PT of Rs2,700.