TCS displayed a weak performance in a seasonally strong quarter. It disappointed on revenue (+8.4% y-o-y CC in Q2FY20 v/s 10.6% in Q1FY20) and Ebit margin (- 20bp q-o-q/-250bp y-o-y to 24.0%) fronts. PBT grew 0.3% y-o-y to `105 bn. PAT was flat y-o-y at `80 bn (in-line), led by higher other income (`11.6 bn v/s our estimate of `9.7 bn), marginally offset by lower operational income. For H1FY20, revenue/Ebit/PBT/PAT were up 8.5%/ 1.3%/ 4.3%/ 5.1% y-o-y. Deal signing was strong at $6.4 bn in Q2FY20.

BFSI drags; retail recovery uncertain
TCS indicated pockets of weakness in capital markets within banking and finance (BFS) and slower spending in European banks. Revenue growth in both BFSI (8% y-o-y CC) and Retail (4.8% y-o-y CC) decelerated by 120bp+ compared to the previous quarter. Retail saw deferral of revenues that were expected to come in from this quarter. Two verticals grew in double digits – Healthcare &; Life Sciences (+16% y-o-y CC) and Communication &; Media (+11.8% y-o-y). Regional markets saw a sporadic decline (in absolute terms) due to weak spending by Japan, the Middle East and India.

Margin contraction attributed to revenue-cost mismatch
The Q2 margin showing was weaker than expected, led by a dip in utilisation owing to employee addition. Margin contraction due to employee revenue arbitrage may normalise in H2 once cost-optimisation levers kick in. Pyramid rationalisation also remains key for optimising margins.

Valuation view
We downgrade our operational earnings estimate by 2-4%. Growth performance this quarter only dampens the FY20 growth prospects further. Ebit margin contraction of 250bp y-o-y is a reflection of high pressure on earnings growth. However, margins are likely to recover to an extent because of normalisation of utilisation. As we rationalise our ETR expectations, the EPS downgrade impact is only partial. Demand outlook for the medium term remains healthy considering strong deal wins. We expect USD revenue/EPS CAGR of 7%/7.5% over FY19-21. Our price target of Rs 2,000 discounts forward earnings by 20x. Maintain Neutral.