TCS Share Price: Strong Performance in Q3, Management gains market share on strong demand outlook

Sharekhan maintains a Buy rating on TCS with a revised Price Target of Rs 3590. For TCS, Q3 FY21 was the second consecutive quarter of strong all-round performance, led by a strong demand environment, market share gains and quick revenue conversion from deals won earlier. The company reported better-than-expected revenue growth of 4.1% qoq on constant currency (CC) in a seasonally weak quarter, which is the strongest in the December quarter in the last nine years. On a yoy basis, the company came back to a positive growth trajectory with a CC growth of 0.4%.

EBIT margins improved 42 bps qoq to 26.6% despite wage revision (-160 bps), ahead of our estimates, supported by strong revenue growth, operational efficiencies through secure borderless workspace (SBWS) operating model and currency tailwinds. Net income stood at Rs. 8,701 crore (up 3.2% q-o-q/7.2% yoy), beating our estimates, led by strong revenue growth and higher-than-expected margin expansion. In addition, the company reported strongest cash conversion, best deal wins in the BFSI vertical (even excluding the Postbank Systems deal, which was completed on January 1, 2021), highest-ever quarterly net employee addition (including 1,500 employees of Pramerica Systems) and all-time low attrition rate during the quarter.

Deal win TCVs increased 11.5% qoq (excluding the Phoenix deal TCV from Q2FY2021) and 13.3% yoy, which provides strong revenue visibility going ahead. TCS’ management indicated that cloud transformation is a multi-year opportunity.

Further, the management believes that BFSI vertical would drive growth in the medium-to-long term given:

1) low cloud penetration levels among banks
2) significant investments in products in the wealth management space
3) adoption of cloud among insurance clients.

In addition, the management indicated that the sector’s growth would be driven by the investments in the areas of:

(1) growth and transformation where enterprises adopts new business models and reimagine customer experience
(2) drive efficiency and greater productivity. Given its end-to-end capabilities, deep domain expertise, contextual knowledge and excellent product and platform offerings,
Sharekhan believes TCS is well placed from a competitive perspective. Hence, management remains confident that the company would return to double digit growth in FY2022E.

Key positives:

1) EBIT margins improved despite wage revision, a way above street’s expectations
2) TCVs in BFSI vertical stood at $2.6 billion, strongest in its history Š
3) Cash conversion remained strong with FCF/EBITDA at 92%

Key negatives:

Client addition was flat and would remain soft in the next couple of quarter

Key risk:

Rupee appreciation and/or adverse cross-currency movements and/or constraint in local talent supply in the US and a stringent visa regime would affect earnings.