Prabhudas Lilladher Recommends Buying TCS Stock, Sets ₹4,920 Target

Prabhudas Lilladher has a positive outlook on Tata Consultancy Services (TCS) and has given a “Buy” rating on the stock with a target price of ₹4,920, according to their report dated October 11, 2024.

TCS Financial Performance

• TCS reported revenue of $7.7 billion, showing a 1.1% growth in constant currency (CC) from the previous quarter. This was slightly below the expectations of 1.5% growth from Prabhudas Lilladher and 1.3% from other analysts. In dollar terms, the revenue grew by 2.2% compared to the previous quarter, close to the estimate of 2.3%.
• The company’s growth was mainly driven by regional markets, especially the BSNL deal, which contributed around 150 basis points (bps) to the growth in Q2.
• Growth in the Banking, Financial Services, and Insurance (BFSI) sector also showed signs of improvement, but certain areas saw slower growth due to changes in project scopes and cautious spending.

Margins and Contracts

• TCS’s EBIT (earnings before interest and taxes) margin dropped by 60 bps to 24.1%, mainly due to higher third-party costs and increased subcontractor expenses. However, currency movements helped slightly, and the impact of Q1 wage increases was no longer a factor.
• Total contract value (TCV) for new deals increased by 3.6% to $8.6 billion, with the book-to-bill ratio remaining stable at 1.1x, meaning the company is winning new business at a healthy rate compared to what it’s billing.
• The strong performance of the BSNL deal and recovery in the BFSI sector played a major role in Q2. But challenges in consumer and asset-heavy sectors, along with client-specific issues in the Life Sciences vertical, affected overall growth. Despite this, management is optimistic about stabilizing performance in Q3 and picking up pace in Q4.

Outlook for the Coming Quarters

• TCS is confident that the continued progress of the BSNL deal will support growth in the second half of the year, while the Life Sciences sector is expected to recover. Strong employee additions over the past two quarters and the stable TCV indicate that the company is in a good position for future growth.
• Prabhudas Lilladher has reduced its revenue growth estimates slightly for FY25 and FY26, now forecasting 6.4%, 8%, and 9.4% USD revenue growth for FY25, FY26, and FY27, respectively.

Margins Outlook

• The margin decline was primarily due to the ramp-up of the BSNL deal, while other high-margin businesses were weaker in Q2. The BSNL deal is expected to continue driving revenue until it moves into its maintenance phase by early FY26, which could further pressure margins in the short term. As a result, margin estimates for FY25 and FY26 have been cut by 60 bps and 30 bps.

Valuation and Final Thoughts

• Prabhudas Lilladher believes that TCS is well-positioned to benefit from current enterprise spending, as companies are focusing on improving their core operations and efficiency. TCS is expected to capture a significant share of these investments, outperforming its competitors.
• The firm expects TCS to see an 8% annual growth in USD revenue and 11.8% growth in earnings from FY24 to FY27. With the stock currently trading at 24x its estimated FY27 earnings, they have set a P/E ratio of 28x FY27 estimates, leading to a target price of ₹4,920. The recommendation remains a “Buy.”

Summary of Key Points:

• TCS reported $7.67 billion in revenue, growing by 1.1% in CC and 2.2% in dollar terms.
• Growth was driven by regional markets, particularly the BSNL deal, and the BFSI sector, but other sectors like Manufacturing and Life Sciences saw declines.
• EBIT margins fell to 24.1%, missing expectations.
• TCS’s strong contract wins and employee additions suggest growth potential in the coming quarters.
• The target price is set at ₹4,920, with a “Buy” rating from Prabhudas Lilladher.