TCS Q4FY18 results review: What leading brokerages say

(From left) Head of Global Human Resources Ajoyendra Mukherjee and TCS CEO & MD Rajesh Gopinathan at a press conference to announce the company's Q4 financial results in Mumbai (Photo: Kamlesh Pednekar)
Tata Consultancy Services (TCS) hit its 52-week high of Rs 3,304 on Friday at the NSE, after the company announced an impressive numbers for the March 2018 quarter (Q4FY18). The Mumbai-headquartered company posted double-digit revenue growth in dollar terms in Q4 for the first time in the last 12 quarters.

Thus far in calendar year 2018 (CY18), TCS has outperformed the markets with a gain of over 18 per cent. In comparison, the Nifty IT and the Nifty 50 indices have moved up 13 per cent and 0.3 per cent respectively, ACE Equity data shows.

Given the outperformance and the stellar Q4FY18 results, is it a good time to buy the stock? Here’s what leading brokerages and research houses suggest.

EDELWEISS RESEARCH

TCS reported 11.7% year-on-year (y-o-y) USD growth for Q4FY18, although constant currency (CC) growth was lower at 7.2% in spite of just 2.9% and 8.4% growth in BFSI and retail that contribute 31.5% and 12.3% to revenues, respectively. 

With robust deal wins and green-shoots in BFSI, there is definite possibility of double-digit revenue growth. With growth acceleration, scale up in digital and support from currency, margins are ready for uptick as well, implying return of double-digit revenue/earnings growth after three years. 

Bonus share (1:1) and 80-100 per cent free cash flow (FCF) distribution is the icing on the cake. However, current valuations at 19.2x FY20E EPS offers limited upside. But, we do not see downside to the stock despite high multiple due to sector tailwinds and high cash returns. Maintain ‘HOLD/SP’ with a revised target price of Rs 3,321 (Rs 3,250 earlier; 20x FY20E EPS).

MOTILAL OSWAL RESEARCH

TCS will start the year with ~200bp headwind to margins from wage hikes, and the task to get to 26% on a full-year basis appears a daunting one. That said, currencies are expected to push EBIT and dollar revenue growth for FY19 in double-digits. 

Also, the risk from the BEAT clause on the effective tax rate was alleviated by the guidance of only 1pp higher tax rate, going forward. The stock already trades at 19x FY20E earnings, and continued single-digit growth rate will not make a case further expansion in valuation multiples. Maintain Neutral rating.

PRABHUDAS LILLADHER

Led by USD revenue upgrade and modest INR reset to lower levels, we upgrade our EPS estimates by 1.4/2% for FY19/FY20E to Rs 149 / 161 per share. Stock trades at 19.8x FY20E EPS. TCS is currently trading at par with Accenture on the valuation front (vs 18% discount to Accenture trades three months ago). Uptick in revenue trajectory leads to us reā€rate multiples. We value TCS at 21x FY20E EPS (vs 17.5x FY20E earlier) which yields a target price of Rs 3380 / share. This represents a 20% upgrade in our target price. Retain Accumulate.

ANTIQUE STOCK BROKING

New service organization and closely integrated consulting business is driving a sharper focus on digital, resulting in significant market share gains for the company. We increase revenue estimates and now factor in FY19E/20E USD revenue growth of 11.4%/10.5% respectively. 

Rupee depreciation will further aid revenue and EPS growth and we forecast 13% EPS CAGR over FY18-20E. On the back of improved outlook, we upgrade TCS to BUY with a target price of Rs 3,450 based on 20x FY20 EPS. Company also provides cash return yield of 3-4%.

ELARA CAPITAL

TCS management has reiterated that they will continue to target EBIT band of 26-28%. We increase revenue estimate by 1.0% and 1.1% for FY19E and FY20E. We lower EBITDA margin by 154bp and 138bp for FY19E and FY20E respectively as we assume conservatively that there is no transition cost in Q4 that elevated employee costs. 

Considering low execution risk (given strong deal pipeline, low trainee bench per our estimate), we retain our Accumulate rating and arrive at a new TP of INR 3,470 on 20x March 2020E P/E (vs 20x March 2019E P/E)

IDBI CAPITAL

We are now more confident of TCS seeing the best improvement in FY19 revenue growth (organic) amongst IT large-caps and forecast FY18-20 revenue (US$)/EPS CAGR of 11.1%/13.3%. We maintain ACCUMULATE with new target price of Rs 3,462 based on PER of 20x FY20E (vs. 18x).

EMKAY GLOBAL

Our view on TCS sustained financial outperformance get further reinforced post the management commentary on improved deal signings, broad-based growth performance, and company’s emerging supremacy in Digital business. We have revised up our earnings estimate by 1%/3% for FY19/20e and maintain our ACCUMULATE rating on the stock with target price of Rs 3,330 (valued at 20x FY20e earnings – 2x on PEG).

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