Proud moment! India's TCS becomes world's largest IT company, beats Accenture! Surpasses Reliance Industries market capitalisation

According to Bloomberg data guide, TCS valuation at Monday's close stood at $169.25 bn, Accenture’s market cap was at $168.68 bn. Also, TCS surpassed Reliance Industries to become the country's most-valued firm by market capitalisation. HDFC Securities maintains ADD on Tata Consultancy Services, following a back to back stellar performance and positive commentary from the management.

TCS II Key positives included:

(1)   TCS broad-based (verticals & services) growth outperformance (strongest 3Q in nine years) supported by better conversions
(2)    TCS robust deal wins with TCV at USD 6.8bn (ex-PBS Deutsche deal), 9M FY21 TCV higher by 23% and strong bookings/ramp-up expected in Q4
(3)   TCS margin outperformance supported by operating leverage & efficiencies

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TCS management provided a ‘double-digit’ outlook for FY22/CY21 (HDFC Securities have factored in 14.8% for FY22E) and ‘sustainability of momentum’ for 3-5 years secular cycle of cloud adoption. Strong outlook for BFSI vertical (strongest-ever BFSI deal bookings), investments in hyperscalers units, improving supply-side metrics (stronger linkages with revenue growth and an uptick in contextual masters), and lowest-ever attrition were other highlights. Target price of Rs 3435 is based on 28x Dec-22E EPS (27x earlier) with EPS CAGR at 19% over FY21-23E.

TCS Q3 FY21 highlights:

(1)   TCS Revenue came at the highest ever 3Q in the past nine years at 4.1% QoQ CC (0.4% YoY)
(2)    TCS EBIT margin hit a 19-quarter high at 26.6%, +42bps QoQ supported by operating leverage and FX tailwind, which offset the negative impact of salary hike (-160bps QoQ)
(3)   TCS Net additions included 1,500 from Pramerica Ireland (Prudential) and 12,000 trainees were onboarded in Q3
(4)    TCS BFSI and Retail & CPG verticals grew 2% QoQ and 3.1% QoQ in CC terms and BFSI growth ex-seasonality impact was similar to Q2.

TCS Outlook:

TCS’ gold standard in execution/scale will be supported by industry tailwinds of a strong tech cycle. HDFC Securities have factored in USD revenue growth of 0.4%, 14.8%, 10.7% for FY21/22/23E with Q4 FY21 at 3.9% QoQ. EBIT margin for TCS factored at 26.8%, 27.3% for FY22/23E. Valuations are at 28.4/24.6x with FY21-23E EPS CAGR at 19%.