TCS Rating: Revenue progress lost estimates in Q1


TCS started a miss in revenue growth at 2.4% q-o-q in cc terms (vs 3.3% consensus expectations). The success of 70-80bp was thanks to the billing loss in India on the rear of the second wave of COVID-19. But, even after obliging this hit, we believe the earnings advancement cycle is fundamentally behind TCS.

The multi-year tech advancement cycle to which IT firms have mentioned has raised the medium-term development outlook of the industry from 6-7% to around 8-9%, but at this stage, it’s not clear to us that double-digit development is going to be sure beyond the Financial year 2022.

Predictable double-digit growth in the Financial year 2022 isn’t, in our view representative of medium-term development helped also by base effects of the Financial year 2021 lower revenues, but higher deal wins; just the exit rate from the Financial year 2021 would cause 8% growth for TCS.

TCS remains to impress on operating flexibility and reported margins of 25.5% despite the raise. We are worried about sector margins as costs normalize but TCS seems the simplest located among its industry peers to manage cost pressures.

Q1FY22 Highpoints: TCS’s 2.4% q-o-q cc revenue development was led by bioscience and Healthcare again (up 7.3% q-o-q cc). Manufacturing (up 4.8%) retail CPG (up 4.4%) and BFSI (up 3.1%) raised also though weakness in regional markets (down 5% q-o-q) hauled down development. Management believes demand is healthy and is seeing signs of renewal in industries most wedged by the pandemic like travel and hospitality.

In the terms of geography, North America (up 4.1% q-o-q) continued strong while continental Europe slowed (up 1.5% q-o-q cc). The second wave of COVID-19 in India (c5.5% of revenues) ran to a 14.4% q-o-q decline in revenues. Earnings Before Interest and Taxes (Ebit) margin of 25.5% was down 130bp q-o-q mainly thanks to wage hikes (170bp impact) offset by promising currency movements.

Changes in estimates and valuation: We tweak our EPS estimates for the Financial year 2022 (down 1.3%) to think about Q1 revenues and to reflect a small uptick in travel and other costs. We keep our target multiple unchanged at 31x which is at a c45% premium to the market due to its strong operating metrics and skill to manage cost pressures. We uphold with a reviewed TP of Rs 3,455 (Rs 3,470 earlier).

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