Tata Consultancy Services’ (TCS’) Q4FY19 revenue of $5.4 bn grew 2.8% q-o-q (2.4% in cc) surpassing Street’s 2.2% estimate. However, operating margin dipped 50bps q-o-q to 25.1% (Street’s estimate 25.5%). Key highlights: (i) management commentary indicates strong outlook underpinned by $6.2-bn deal wins during the quarter; (ii) robust digital momentum is likely to sustain with 46.4% y-o-y cc growth; and (iii) despite supply-side issues, TCS’ attrition was contained at 11.3%—amongst the lowest in the industry. Improving digital revenue growth, robust deal wins and optimistic sector outlook reinforce our IT – Baring its FAANGs thesis. While TCS sustained strong execution, we maintain Hold due to rich valuations (21.4x FY20e EPS) with TP of `2,137.
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Healthy revenue growth
Despite seasonal challenges, TCS reported 2.4% q-o-q and 12.7% y-o-y (cc) revenue growth led by a spurt across verticals and geographies. Three of its largest verticals— Life sciences, FSI and energy & utilities—were key contributors to growth. Amongst geographies, growth was strong in UK (21.3%), Continental Europe (17.5%), followed by North America (9.9%). We believe, TCS will continue to effectively monetise its strong digital capabilities.
Low attrition reflects great execution
Though Q4FY19 operating margin dipped 50bps q-o-q, FY19 margin improved 80bps y-o-y. We attribute the latter to higher growth and excellent execution. Moreover, TCS’ investments in digital capabilities and sales initiatives are now yielding dividends. We believe, margin will sustain at the current level.
Outlook: Upside priced in
Sector tailwinds are accelerating TCS’ revenue growth. We believe the company has the best digital and execution capabilities and despite its size, it will report industry-leading growth. However, the stock trades at a rich 21.4x FY20e EPS, a significant premium to large-cap peers. Hence, we believe the current share price factors in the underlying sector tailwinds. Therefore, we maintain ‘HOLD/SP’.