3QFY2019 Result Update | IT
January 11, 2019
Tata Consultancy Services (TCS)
NEUTRAL
CMP
`1,889
Performance highlights
Target Price
(` cr)
3QFY19
2QFY19 % chg (QoQ) 3QFY18
% chg (yoy)
Investment Period
12 Months
Net revenue
37,338
36,854
1.3
30,904
20.8
Adj. EBITDA
7,065
10,364
(31.8)
8,287
(14.7)
Adj. EBITDA margin (%)
27.2
28.1
(92)bp
26.8
39bp
Adj. PAT
8,105
7,901
2.6
6,531
24.1
Source: Company, Angel Research
Stock Info
Sector
IT
TCS posted a
0.7% sequential growth in USD revenues to US$5,250mn v/s
Market Cap (` cr)
708,507
US$5,215mn in 2QFY2019. In rupee terms, revenues came in at `37,338cr V/s `36,854cr,
Net Debt (` cr)
(45,288)
up 1.3% QoQ. In Constant Currency (CC) terms, the company posted a 1.8% QoQ
Beta
0.3
growth. On profitability front, EBIT margin showed a dip of ~90bps QoQ to 25.6%.
52 Week High / Low
2,273/1,349
Avg. D aily Volum e
192,405
Consequently, PAT came in at 8,105cr v/s `7,901cr in 2QFY2019, up of 2.6% QoQ. We
Face Value (`)
1
recommend a neutral rating on the stock.
BSE Sensex
36,107
Nifty
10,822
Quarterly highlights: TCS posted a 0.7% sequential growth in USD revenues to
Reuters Code
TCS.BO
US$5,250mn v/s US$5,215mn in 2QFY2019. In Constant Currency (CC) terms, the
Bloomberg Code
[email protected]
company posted a 1.8% QoQ growth. Geography wise, the growth was broadly well
spread. In terms of verticals, key verticals BFSI, Retail & CPG & Communication &
Shareholding Pattern (%)
Prom oters
72.1
Media registered a yoy CC growth of 8.6%, 10.5% and 10.8% respectively. Other
MF / Banks / Indian Fls
7.8
verticals like Manufacturing & Technology Services posted yoy growth of 6.7% and
FII / NRIs / OCBs
16.1
5.8% on CC terms. On profitability front, EBIT margin showed a dip of ~90bps QoQ to
Indian Public / Others
4.1
25.6%. Consequently, PAT came in at 8,105cr V/s `7,901cr in 2QFY2019, up 2.6% QoQ.
Abs .(% )
3m
1 yr
3 yr
Outlook and valuation: Over FY2018-21E, we expect TCS to post revenue CAGR
Sensex
2.7
4.9
45.4
of 9.5% & 13.1% in USD & INR terms respectively. The company highlighted that
TCS
(1.1)
34.5
59.8
it stands comfortable in sustaining the EBIT margin in the range of 26-28%. On
the EBIT and PAT fronts, we expect the company to post 13.4% and 11.7% CAGR
over FY2018-21E respectively. The stock is trading at 21.3x FY2020E EPS of
`88.7.Valuations already discount a robust medium growth & favorable
3-Year Daily Price Chart
operating environment and valuations are higher than its P/E averages.
2,500
However, given the good cash yield we recommend a Neutral.
2,000
Key financials (Consolidated, IFRS)
1,500
Y/E March (` cr)
FY2018
FY2019
FY2020E
FY2021E
1,000
Net sales
123,104
149,085
163,248
177,941
% chg
4.4
21.1
9.5
9.0
500
Net profit
25,826
31,194
33,284
36,030
0
% chg
(1.8)
20.8
6.7
8.3
EBITDA margin (%)
26.6
27.2
26.7
26.7
EPS (`)
67.5
83.1
88.7
96.0
Source: Company, Angel Research
P/E (x)
28.0
22.7
21.3
19.7
P/BV (x)
8.2
8.4
7.5
6.7
RoE (%)
29.5
36.9
35.2
34.2
Sarabjit kour Nangra
RoCE (%)
28.0
35.1
33.8
33.1
+91 22 3935 7800 Ext: 6806
EV/Sales (x)
5.3
4.4
3.9
3.6
sarabjit @angelbroking.com
EV/EBITDA (x)
19.8
16.1
14.7
13.3
Source: Company, Angel Research; Note: CMP as of January 10, 2018
Please refer to important disclosures at the end of this report
1
TCS | 3QFY2019 Result Update
Exhibit 1: 3QFY2019 performance (Consolidated, IFRS)
(` cr)
3QFY2019
2QFY2019
% chg (QoQ) 3QFY2018
% chg (yoy) 9MFY2019 9MFY2018
% chg(yoy)
Net revenue
37,338
36,854
1.3
30,904
20.8
1,08,453
91,029
19.1
Cost of revenue
21,142
20,607
2.6
17,356
21.8
61,434
51,255
19.9
Gross profit
16,196
16,247
(0.3)
13,548
19.5
47,019
39,774
18.2
SG&A expense
6,039
5,883
2.7
5,261
14.8
17,522
15,910
10.1
EBITDA
10,157
10,364
(2.0)
8,287
22.6
29,497
23,864
23.6
Dep. and Amortization
593
593
-
506
17.2
1,584
1,509
5.0
EBIT
9,564
9,771
(2.1)
7,781
22.9
27,913
22,355
24.9
Other income
1,147
593
93.4
864
32.8
2,948
2,608
13.0
PBT
10,711
10,364
3.3
8,645
23.9
30,861
24,963
23.6
Income tax
2,590
2,437
6.3
2,100
23.3
7,451
6,008
24.0
PAT
8,121
7,927
2.4
6,545
24.1
23,410
18,955
23.5
Earnings in affiliates
-
-
-
-
-
-
-
Minority interest
16
26
14
-
-
33
Reported PAT
8,105
7,901
2.6
6,531
24.1
23,410
18,922
23.7
Adj. PAT
8,105
7,901
2.6
6,531
24.1
23,410
18,922
23.7
EPS
21.6
20.7
4.5
16.8
28.3
62.4
49.5
26.1
Gross margin (%)
43.4
44.1
(71)bps
43.8
(46)bps
43.4
43.7
(34)bps
EBITDA margin (%)
27.2
28.1
(92)bps
26.8
39bps
27.2
26.2
98bps
EBIT margin (%)
25.6
26.5
(90)bps
25.2
44bps
25.7
24.6
118bps
Source: Company, Angel Research
Key geographies & verticals doing well
TCS posted a 3.2% sequential growth in USD revenues to US$5,250mn v/s US$5,215mn
in 2QFY2019. In Constant Currency (CC) terms, the company posted a 1.8% QoQ growth.
Geography wise, the growth was broadly well spread. USA - North America & Latin
America registered a yoy CC growth of 8.2% and 7.6% respectively. In Europe- UK &
Continental Europe registered a yoy CC growth of 25.1% and 17.6% respectively. India
& Asia Pacific registered a yoy CC growth of 9.7% and 12.6% respectively.
In terms of verticals, BFSI, Retail & CPG & Communication & Media registered a yoy CC
growth of 8.6%, 10.5% and 10.8% respectively. Other verticals like Manufacturing &
Technology Services posted yoy growth of 6.7% and 5.8% on CC terms. Growth in Digital
was 52.7% yoy in CC terms and it now constitutes to 30.1% of total revenue. Digital was
around 22.1% of sales in 3QFY2018. TCS pipeline expanded across segments and
geographies. Total TCV of deals in 3QFY2019 amounted to US$ 5.9bn.
January 11, 2019
2
TCS | 3QFY2019 Result Update
Exhibit 2: Revenue growth (Industry wise on CC basis)
% to revenue
% chg (yoy)
BFSI
30.8
8.6
Manufacturing
7.2
6.7
Communication & Media
6.9
10.8
Life sciences and healthcare
7.6
15.7
Retail and CPG
16.5
10.5
Energy and utilities
4.7
18.1
Technology & Services
7.6
5.8
Regional Markets & Others
18.7
22.6
Source: Company, Angel Research
Exhibit 3: Revenue growth (Geography wise in INR terms)
% of revenue
% chg (yoy)
U.S.
51.2
8.2
Latin America
2.0
7.6
U.K.
15.5
25.1
Continental Europe
14.1
17.6
India
5.7
9.7
Asia Pacific
9.4
12.6
MEA
2.1
(3.3)
Source: Company, Angel Research
Attrition rate inches up
In 3QFY2019, TCS witnessed a gross addition of 12,534 employees and net addition of
6,827 employees, taking its total employee base to 4,17,929. During the quarter, the
attrition rate (last twelve-month [LTM] basis) for the company increased to 11.2% from
10.9% in 2QFY2019.
Exhibit 4: Hiring & attrition trend
Particulars
3QFY18 4QFY18
1QFY19
2QFY19
3QFY19
Net addition
3,404
1,667
4,118
5,877
6,827
Total employee base
3,90,880
3,94,998
4,00,875
4,11,102
4,17,929
Attrition (%) - LTM basis
11.9
11.8
11.7
10.9
11.2
Source: Company, Angel Research
Margin dips; mainly driven by subcontracting costs
On the operating front, the company reported EBITDA and EBIT margins at 27.2%
and 25.6%, i.e. a dip of 92ps and 90bps QoQ respectively. A major part of the dip
was on back of subcontracting costs. Sub-con costs were 7.9% of revenues (the
highest in recent history) compared to 7.2% in 2QFY2019. The company has
maintained an EBIT margin target of 26-28%.
January 11, 2019
3
TCS | 3QFY2019 Result Update
Exhibit 5: Adj. Margin profile (%)
30
28.1
26.8
27.0
27.2
26.2
25
26.5
25.2
25.4
25.6
25.0
20
15
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
EBITDA margin
EBIT margin
Source: Company, Angel Research
Client metrics
The client pyramid during the quarter witnessed a qualitative improvement with
client additions seen in the higher revenue brackets. The clients in US$10mn+
revenue band increased by 7 and in US$100mn+ revenue band increased by 1.
Exhibit 6: Client pyramid
3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
US$1mn-5mn
456
468
470
476
477
US$5mn-10mn
148
145
153
148
149
US$10mn-20mn
134
143
149
152
159
US$20mn-50mn
109
110
109
115
112
US$50mn-100mn
57
59
57
54
54
US$100mn plus
37
38
40
44
45
Source: Company, Angel Research
Outlook & Valuations
Over FY2018-21E, we expect TCS to post revenue CAGR of 9.5% & 13.1% in USD &
INR terms respectively. The company highlighted that it stands comfortable in
sustaining the EBIT margin in the range of 26-28%. On the EBIT and PAT fronts, we
expect the company to post 13.4% and 11.7% CAGR over FY2018-21E respectively.
The stock is trading at 21.3x FY2020E EPS of `88.7. Valuations already discount a
robust medium growth and favorable operating environment and is at slight
premium to its long-term P/E averages. However, given the cash yield we
recommend a Neutral.
January 11, 2019
4
TCS | 3QFY2019 Result Update
Exhibit 7: Key assumptions
FY2020E
FY2021E
Revenue growth (USD)
9.5
9.0
USD-INR rate (realized)
71.0
71.0
Revenue growth (%)
9.5
9.0
EBITDA margin (%)
26.7
26.7
Tax rate (%)
25.0
25.0
EPS growth (%)
6.7
8.3
Source: Company, Angel Research
Company background
TCS is Asia's largest IT services provider and is amongst the top 10 technology firms
in the world. The company has a global footprint with an employee base of over
4lakh professionals, offering services to more than 1,000 clients across various
industry segments. The company has one of the widest portfolios of service
offerings, spanning across the entire IT service value chain - from traditional
application development and maintenance to consulting and package
implementation to products and platforms.
January 11, 2019
5
TCS | 3QFY2019 Result Update
Profit & Loss statement (Consolidated, IFRS)
Y/E March (` cr)
FY2017
FY2018
FY2019
FY2020E FY2021E
Net sales
117,966
123,104
149,085
163,248
177,941
Cost of revenue
64,764
69,072
82,444
90,276
98,401
Gross profit
53,202
54,032
66,641
72,972
79,539
% of net sales
45.1
43.9
44.7
44.7
44.7
SGA expenses
20,755
21,314
26,090
29,385
32,029
% of net sales
17.6
17.3
17.5
18.0
18.0
EBITDA
32,447
32,718
40,551
43,587
47,510
% of net sales
27.5
26.6
27.2
26.7
26.7
Dep. and amortization
2123
2216
2534
2775
3025
% of net sales
1.8
1.8
1.7
1.7
1.7
EBIT
30,324
30,502
38,017
40,812
44,485
% of net sales
25.7
24.8
25.5
25.0
25.0
Other income, net
4189
3590
3700
3700
3700
Profit before tax
34,513
34,092
41,717
44,512
48,185
Provision for tax
8,156
8,212
10,429
11,128
12,046
% of PBT
23.6
24.1
25.0
25.0
25.0
PAT
26,357
25,880
31,288
33,384
36,139
Minority interest
68
54
94
100
108
Extra-ordinary (Exp.)/ Inc.
Reported PAT
26,289
25,826
31,194
33,284
36,030
Adj. PAT
26,289
25,826
31,194
33,284
36,030
Diluted EPS (`)
68.7
67.5
83.1
88.7
96.0
January 11, 2019
6
TCS | 3QFY2019 Result Update
Balance sheet (Consolidated, IFRS)
Y/E March (` cr)
FY2017 FY2018
FY2019 FY2020E FY2021E
Assets
Cash and cash equivalents
3,597.0
4,883.0
5,240.4
5,326.2
4,782.0
Other current financial assets
-
6,395
6,395
6,395
6,395
Accounts receivable
22,684
24,943
27,437
30,181
33,199
Unbilled revenues
5,351
6,686
8,097
8,866
9,664
Other current assets
7,258
2,610
2,610
2,610
2,611
Property and equipment
11,741
11,600
11,700
11,800
11,900
Intangible assets and goodwill
3,768
3,896
3,896
3,896
3,896
Investments
41,980
36,008
30,908
39,747
50,074
Other non-current assets
8,974
12,034
12,034
12,034
12,034
Total assets
105,353
109,055
108,318
120,856
134,555
Liabilities
Current liabilities
14,294
17,828
20,146
22,765
25,724
Short term borrowings
218
193
193
193
194
Redeemable preference shares
-
-
-
-
-
Long term debt
71
54
54
54
55
Other non-current liabilities
2,089
2,935
2,935
2,935
2,935
Minority interest
366
402
402
402
403
Shareholders’ funds
88,315
87,643
84,588
94,507
105,244
Total liabilities
105,353
109,055
108,318
120,856
134,555
January 11, 2019
7
TCS | 3QFY2019 Result Update
Cash flow statement (Consolidated, IFRS)
Y/E March (` cr)
FY2017 FY2018 FY2019 FY2020E FY2021E
Pre-tax profit from oper.
26,357
25,880
31,288
33,384
36,139
Depreciation
2,123
2,216
2,534
2,775
3,025
Exp. (deferred)/written off
-
-
-
-
-
Pretax cash from oper
28,480
28,096
33,822
36,159
39,164
Other inc./prior period ad
2,123
2,216
2,534
2,775
3,025
Net cash from operations
30,604
30,312
36,356
38,934
42,189
Tax
8,156
8,212
10,429
11,128
12,046
Cash profits
22,448
22,100
25,927
27,806
30,143
(Inc)/dec in acc. recv.
1,389
(2,259)
(2,494)
(2,744)
(3,018)
(Inc)/dec in unbilled rev.
(1,359)
(1,335)
(1,411)
(769)
(798)
(Inc)/dec in oth. current asst.
(1,283)
4,648
-
-
(1)
Inc/(dec) in current liab.
49
141
(100)
(100)
(100)
Net trade working capital
(1,204)
1,195
(4,005)
(3,613)
(3,917)
Cash flow from opert. actv.
21,243
23,295
21,922
24,194
26,225
(Inc)/dec in fixed assets
49
141
(100)
(100)
(100)
(Inc)/dec in investments
(14,325)
(423)
5,100
(8,839)
(10,327)
(Inc)/dec in intangible asst.
(178)
128
-
-
-
(Inc)/dec in non-cur.asst.
2,945
(3,060)
-
-
-
Cash flow from invt. actv.
(11,509)
(3,214)
5,000
(8,939)
(10,427)
Inc/(dec) in debt
44
(42)
-
-
-
Inc/(dec) in minority int.
12
36
-
-
-
Dividends
(19,993)
(11,258)
(18,248)
(23,365)
(25,293)
Others
10,202
(8,816)
(8,673)
8,111
9,494
Cash flow from finan. actv.
(9,735)
(20,080)
(26,921)
(15,254)
(15,799)
Cash generated/(utilized)
1,735
1,286
357
86
(544)
Cash at start of the year
1,862
3,597
4,883
5,240
5,326
Cash at end of the year
3,597
4,883
5,240
5,326
4,782
January 11, 2019
8
TCS | 3QFY2019 Result Update
Key ratios
Y/E March
FY2017 FY2018 FY2019 FY2020E FY2021E
Valuation ratio(x)
P/E (on FDEPS)
27.5
28.0
22.7
21.3
19.7
P/CEPS
25.4
25.8
21.0
19.7
18.1
P/BVPS
8.2
8.2
8.4
7.5
6.7
Dividend yield (%)
1.2
1.3
2.2
2.8
3.1
EV/Sales
5.5
5.3
4.4
3.9
3.6
EV/EBITDA
20.0
19.8
16.1
14.7
13.3
EV/Total assets
6.2
5.9
6.0
5.3
4.7
Per share data (`)
EPS
68.7
67.5
83.1
88.7
96.0
Cash EPS
74.3
73.3
89.9
96.1
104.1
Dividend
23.5
25.0
41.6
53.2
57.6
Book value
231
229
225
252
280
DuPont analysis
Tax retention ratio (PAT/PBT)
0.8
0.8
0.8
0.8
0.8
Cost of debt (PBT/EBIT)
1.1
1.1
1.1
1.1
1.1
EBIT margin (EBIT/Sales)
0.3
0.2
0.3
0.3
0.3
Asset turnover ratio (Sales/Assets)
1.1
1.1
1.4
1.4
1.3
Leverage ratio (Assets/Equity)
1.2
1.2
1.3
1.3
1.3
Operating ROE
29.8
29.5
37.0
35.3
34.3
Return ratios (%)
RoCE (pre-tax)
28.8
28.0
35.1
33.8
33.1
Angel RoIC
50.7
49.4
57.8
58.8
60.7
RoE
29.8
29.5
36.9
35.2
34.2
Turnover ratios(x)
Asset turnover (fixed assets)
10.0
10.6
12.7
13.8
15.0
Receivables days
70
74
67
67
68
January 11, 2019
9
TCS | 3QFY2019 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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Disclosure of Interest Statement
TCS
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or
No
relatives
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
January 11, 2019
10