2QFY2018 Result Update | IT

October 25, 2017

Tata Consultancy Services (TCS)

NEUTRAL

CMP

`2,586

Performance highlights

Target Price

(` cr)

2QFY18

1QFY18

% chg (qoq)

2QFY17

% chg (yoy)

Investment Period

12 Months

Net revenue

30,541

29,584

3.2

29,284

4.3

Adj. EBITDA

7,065

7,413

(4.7)

7,965

(11.4)

Stock Info

Adj. EBITDA margin (%)

26.8

25.1

171bp

27.2

(94.1)bp

Sector

Adj. PAT

6,460

5,950

8.6

6,603

(2.2)

Market Cap (` cr)

4,95,025

Source: Company, Angel Research

Net Debt (` cr)

-45,288

For 2QFY2018, TCS posted above expectation results on the EBIT and net profit fronts.

Beta

0.5

The company posted 3.2% sequential growth in USD revenues to US$4,739mn v/s.

52 Week High / Low

2,834/2,055

US$4,738mn expected, mostly driven by volume (3.2% qoq growth). In Constant Currency

Avg. Daily Volume

52,445

(CC) terms, the company posted a 1.7% qoq growth. EBIT margins came in at 25.1% v/s.

Face Value (`)

24.1% expected, posting a qoq expansion of 171bps. Consequently, PAT came in at

BSE Sensex

32,507

`6,460cr v/s. `6,314cr expected, growing 8.6% qoq. We maintain our Neutral rating.

Nifty

10,185

Reuters Code

TCS.BO

Quarterly highlights: Company posted 3.2% sequential growth in USD revenues to

Bloomberg Code

TCS@IN

US$4,739mn v/s. US$4,738mn expected, mostly volume led (3.2% qoq growth). In CC

terms, the company posted a 1.7% qoq growth. Geographically, performance was mixed

within USA (North America posted 1.4% vs Latin America’s 5.7% qoq CC), Europe (UK

Shareholding Pattern (%)

posted a 2.5% qoq CC growth vs 5.3% for Continental Europe), and Asia Pacific (posted a

Promoters

73.6

3.0% qoq CC growth). In terms of verticals, BFSI, Communication & Media,

MF / Banks / Indian Fls

5.7

Manufacturing, Life Sciences & healthcare, and Energy & Utilities posted qoq CC growth of

FII / NRIs / OCBs

16.8

1.9%, 1.4%, 1.9%, 3.6%, and 7.2% respectively. Retail & CPG growth dipped marginally

Indian Public / Others

4.0

by 0.9% qoq CC. In profitability terms, the EBIT margins came in at 25.1% v/s. 24.1%

expected, posting a qoq expansion of 171bps. Consequently, PAT came in at `6,460cr

v/s. `6,314cr expected, a growth of 8.6% qoq.

Abs.(%)

3m 1yr

3yr

Sensex

0.8

15.4

21.1

Outlook and valuation: The Company has been cautiously optimistic regarding its

TCS

2.1

6.5

4.9

outlook for FY2018, with key verticals like BFSI and Hi-Tech expected to post a recovery.

We expect TCS to post revenue CAGR of 8.5% and 6.8% in USD & INR terms respectively

over FY2017-19E. Hence, maintain our Neutral recommendation.

3-Year Daily Price Chart

3,000

Key financials (Consolidated, IFRS)

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

2,000

Net sales

1,08,646

1,17,966

1,23,384

1,34,488

% chg

14.8

8.6

4.6

9.0

1,000

Net profit

24,215

26,289

26,063

28,116

% chg

11.6

8.6

(0.9)

7.9

EBITDA margin (%)

28.3

27.5

26.1

EPS (`)

123.7

134.3

133.2

143.7

P/E (x)

20.9

19.3

19.4

18.0

Source: Company, Angel Research

P/BV (x)

6.9

5.7

5.4

5.0

RoE (%)

33.1

29.8

27.6

27.8

RoCE (%)

31.6

28.8

26.6

27.0

Sarabjit kour Nangra

EV/Sales (x)

4.3

3.8

3.7

3.3

+91 22 3935 7800 Ext: 6806

EV/EBITDA (x)

15.1

13.8

14.0

12.6

sarabjit @angelbroking.com

Source: Company, Angel Research; Note: CMP as of October 23, 2017

Please refer to important disclosures at the end of this report

TCS | 2QFY2018 Result Update

Exhibit 1: 2QFY2018 performance (Consolidated, IFRS)

(` cr)

2QFY2018

1QFY2018

% chg (qoq)

2QFY2017

% chg (yoy)

1HFY2018

1HFY2017

% chg(yoy)

Net revenue

30,541

29,584

3.2

29,284

4.3

60,125

58,589

2.6

Cost of revenue

17,097

16,792

1.8

16,038

6.6

33,889

32,350

4.8

Gross profit

13,444

12,792

5.1

13,246

1.5

26,236

26,239

(0.0)

SG&A expense

5,270

5,379

(2.0)

5,133

2.7

10,649

10,289

3.5

EBITDA

8,174

7,413

10.3

8,113

0.8

15,587

15,950

(2.3)

Dep. and amortisation

514

499

3.0

496

3.6

1,013

986

2.7

EBIT

7,660

6,914

10.8

7,617

0.6

14,574

14,964

(2.6)

Other income

812

932

(12.9)

1,052

(22.8)

1,744

2,015

(13.4)

PBT

8,472

7,846

8.0

8,669

(2.3)

16,318

16,979

(3.9)

Income tax

2,012

1,896

6.1

2,066

(2.6)

3,908

4,058

(3.7)

PAT

6,460

5,950

8.6

6,603

(2.2)

12,410

12,921

(4.0)

Earnings in affiliates

Minority interest

Reported PAT

6,460

5,950

8.6

6,603

(2.2)

12,410

12,921

(4.0)

Adj. PAT

6,460

5,950

8.6

6,603

(2.2)

12,410

12,921

(4.0)

EPS

33.7

30.4

8.6

33.4

(2.2)

64.0

65.5

(4.0)

Gross margin (%)

44.0

43.2

78bp

45.2

(121)bp

43.6

44.8

(115)bp

EBITDA margin (%)

26.8

25.1

171bp

27.7

(94)bp

25.9

27.2

(130)bp

EBIT margin (%)

25.1

23.4

171bp

26.0

(93)bp

24.2

25.5

(130)bp

Source: Company, Angel Research

Exhibit 2: Actual v/s Angel estimates

(` cr)

Actual

Estimate

Var. (%)

Net revenue

30,541

30,465

0.3

EBIT margin (%)

25.1

24.1

100bps

Adj. PAT

6,460

6,314

2.3

Source: Company, Angel Research

Numbers just in-line with expectations

The company posted 3.2% sequential growth in USD revenues to US$4,739mn v/s.

US$4,738mn expected, mostly volume driven (3.2% qoq growth). Constant Currency terms,

the company posted a 1.7% qoq growth. In Rupee terms, revenues are expected to come in

at `30,541cr v/s. `30,465cr expected, up 3.2% qoq.

In terms of verticals, on CC basis, the growth registered by the company in respective

segments was, BFSI (1.9% qoq), Retail & CPG (-0.9% qoq), Communication & Media (1.4%

qoq), Manufacturing

(1.9% qoq), Life Sciences & Healthcare

(3.6% qoq),

Hi-Tech (3.4% qoq), Energy Utilities (7.2% qoq), Travel & Hospitality (8.0% qoq).

In terms of geography, on CC basis, qoq growth was North America (1.4%), Latin America

(5.7%), UK (2.5%), Continental Europe (5.3%), India (-6.8%), Asia Pacific (3.0%), MEA

(1.0%).

October 23, 2017

TCS | 2QFY2018 Result Update

Exhibit 3: Trend in volume and revenue growth (qoq)

Source: Company, Angel Research

Exhibit 4: Revenue drivers for 2QFY2018

Source: Company, Angel Research

Overall growth has been bogged down by relative weakness in the verticals of BFSI

and Retail, similar to 1QFY2018. In BFSI, TCS will assess visibility in the next

quarter by when spending is likely to revive. In Retail, TCS believes it has now

bottomed out and should see improvement going forward. Revenue from Digital

grew by 5.9% qoq, and it now constitutes to 19.7% of total revenue.

Exhibit 5: Revenue growth (Industry wise on CC basis)

% to revenue

% chg (CC qoq)

% chg (yoy)

BFSI

33.0

1.9

4.7

Manufacturing

7.5

1.9

9.6

Communication & Media

7.3

1.4

9.5

Life sciences and healthcare

7.2

3.6

10.3

Retail and CPG

11.9

(0.9)

(1.4)

Transportation & Hospitality

3.8

3.4

23.2

Energy and utilities

4.2

7.2

22.7

Technology & Services

8.1

3.4

10.1

Regional Markets & Others

17.0

(0.6)

6.9

Source: Company, Angel Research

October 23, 2017

TCS | 2QFY2018 Result Update

Geography wise growth in INR sales in key geographies was as follows: USA (1.4%

qoq on CC basis), Latin America (5.7% qoq on CC basis), UK (2.5% qoq on CC

basis), India (-6.8% qoq on CC basis), and MEA (1.0% qoq on CC basis).

However, Continental Europe and Asia Pacific posted growth of 5.3% qoq and

3.0% qoq on CC basis respectively.

Exhibit 6: Revenue growth (Geography wise in INR terms)

% of revenue

% chg (CC qoq)

% chg (yoy)

U.S.

51.9

1.4

3.6

Latin America

2.2

5.7

13.6

U.K.

14.0

2.5

9.2

Continental Europe

13.4

5.3

18.2

India

6.3

(6.8)

14.3

Asia Pacific

9.8

3.0

4.1

MEA

2.4

1.0

7.6

Source: Company, Angel Research

Attrition rate dips

In 2QFY2018, TCS witnessed a gross addition of 15,868 employees and net

addition of 3,404 employees, taking its total employee base to 3,89,213. During

the quarter, the attrition rate (last twelve month [LTM] basis) for the company

increased to 11.3% from 12.4% in 1QFY2018.

Exhibit 7: Hiring and attrition trend

Particulars

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

Gross addition

22,665

18,362

20,093

11,202

15,868

Net addition

9,440

6,978

8,726

(1,414)

3,404

Total employee base

3,71,519

3,78,497

3,87,223

3,85,809

3,89,213

Attrition (%) - LTM basis

12.9

12.2

11.5

12.4

11.3

Source: Company, Angel Research

Margin expands

On the operating front, the company reported EBITDA and EBIT margins at 26.8%

and 25.1%, i.e. an expansion of 171bps and 171bps qoq respectively. While

50bps of this was on account of favorable ` movement against the GBP and EUR,

120bps was led by an improvement in operational efficiencies and cost

rationalization.

October 23, 2017

TCS | 2QFY2018 Result Update

Investment Argument

Guidance - Stability visible: While management has not given any guidance for

FY2018, however it expects its key verticals like BFSI, Communications and Hi-Tech

to stabilize as we move. Digital also continues to see a good traction, constituting

19.7% of total revenue, and having grown by 5.9% qoq CC and 31% yoy. Overall

the volume growth has been robust according to us for the 1HFY2018, in spite of

the challenges. On EBIT front, the company expects to manage its margins in 26-

28% range over medium term. For FY2018, we have estimated the EBIT margins

of 24.3% V/s 24.2% in 1HFY2018. On sales front, we expect the company to post

a US$ revenue CAGR of 8.5% over FY2017-19E.

Management Reggie: With Mr. Natarajan Chandrasekaran being the Chairman of

Tata Sons since February 21, 2017, CFO Mr. Rajesh Gopinathan has taken

charge as the CEO of the company. He started his professional career with TCS in

2001 and was appointed as the CFO in February 2013. TCS also announced N G

Subramanian as the COO of the company. Thus, the new targets under the new

CEO will have a bearing on the performance of the company.

Outlook and valuation

Over FY2017-19E, we expect TCS to post revenue CAGR of 8.5% and 6.8% in

USD and 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 3.8% and 3.4% CAGR over

FY2017-19E respectively. The stock is trading at 18.0x FY2019E EPS of `143.7.

We maintain our Neutral recommendation.

Exhibit 10: Key assumptions

FY2018E

FY2019E

Revenue growth (USD)

8.0

9.0

USD-INR rate (realized)

65.0

Revenue growth (`)

4.6

9.0

EBITDA margin (%)

26.1

Tax rate (%)

23.5

EPS growth (%)

(0.9)

7.9

Source: Company, Angel Research

October 23, 2017

TCS | 2QFY2018 Result Update

Profit & Loss statement (Consolidated, IFRS)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E FY2019E

Net sales

94,648

1,08,646

1,17,966

1,23,384

1,34,488

Cost of revenue

50,599

58,952

64,764

68,478

74,641

Gross profit

44,049

49,695

53,202

54,906

59,847

% of net sales

46.5

45.7

45.1

44.5

SGA expenses

17,353

18,956

20,755

22,703

24,746

% of net sales

18.3

17.4

17.6

18.4

EBITDA

26,696

30,738

32,447

32,203

35,101

% of net sales

28.2

28.3

27.5

26.1

Dep. and amortization

1272

1948

2123

2221

2421

% of net sales

1.3

1.8

EBIT

25,424

28,790

30,324

29,982

32,681

% of net sales

26.9

26.5

25.7

24.3

Other income, net

3140

3050

4189

Profit before tax

28,564

31,840

34,513

34,171

36,870

Provision for tax

6,083

7,503

8,156

8,030

8,664

% of PBT

21.3

23.6

23.5

PAT

22,481

24,338

26,357

26,141

28,205

Minority interest

205

123

Extra-ordinary (Exp.)/ Inc.

-2627.9

Reported PAT

19,648

24,215

26,289

26,063

28,116

Adj. PAT

21,696

24,215

26,289

26,063

28,116

Diluted EPS (`)

110.9

123.7

134.3

133.2

143.7

October 23, 2017

TCS | 2QFY2018 Result Update

Balance sheet (Consolidated, IFRS)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E

FY2019E

Assets

Cash and cash equivalents

1,862

3,597.0

3,477.2

3,356.1

Other current financial assets

16,383

4,833

Accounts receivable

20,440

24,073

22,684

31,694

31,695

Unbilled revenues

3,827

3,992

5,351

5,348

5,349

Other current assets

6,414

5,975

7,258

Property and equipment

11,572

11,790

11,741

12,741

13,741

Intangible assets and goodwill

3,931

3,946

3,768

Investments

9,619

22,822

41,980

39,267

46,761

Other non current assets

906

11,919

8,974

Total assets

74,954

91,212

1,05,353

1,12,527

1,20,901

Liabilities

Current liabilities

14,428

15,407

14,294

14,806

16,139

Short term borrowings

243

162

218

Redeemable preference shares

(0)

Long term debt

114

Other non current liabilities

1,778

2,017

2,089

2,431

2,650

Minority interest

914

354

366

444

533

Shareholders funds

57,477

73,190

88,315

94,557

1,01,291

Total liabilities

74,954

91,212

1,05,353

1,12,527

1,20,901

October 23, 2017

TCS | 2QFY2018 Result Update

Cash flow statement (Consolidated, IFRS)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E

FY2019E

Pre-tax profit from oper.

22,481

24,338

26,357

26,141

28,205

Depreciation

1,272

1,948

2,123

2,221

2,421

Exp. (deferred)/written off

160

174

Pre tax cash from oper

23,913

26,460

28,480

28,362

30,626

Other inc./prior period ad

1,272

1,948

2,123

2,221

2,421

Net cash from operations

25,185

28,408

30,604

30,583

33,047

Tax

6,083

7,503

8,156

8,030

8,664

Cash profits

19,102

20,905

22,448

22,553

24,382

(Inc)/dec in acc. recv.

(2,210)

(3,633)

1,389

(9,010)

(1)

(Inc)/dec in unbilled rev.

179

(165)

(1,359)

(1)

(Inc)/dec in oth. current asst.

(6,414)

439

(1,283)

Inc/(dec) in current liab.

(1,207)

(218)

(1,000)

Net trade working capital

(9,652)

(3,577)

(1,204)

(10,007)

(1,002)

Cash flow from opert. actv.

9,450

17,328

21,243

12,546

23,380

(Inc)/dec in fixed assets

(1,207)

(218)

(1,000)

(Inc)/dec in investments

(4,446)

(1,653)

(14,325)

2,713

(7,494)

(Inc)/dec in intangible asst.

(226)

(178)

(Inc)/dec in non-cur.asst.

(906)

(11,013)

2,945

Cash flow from invt. actv.

(6,786)

(12,869)

(11,509)

1,713

(8,494)

Inc/(dec) in debt

(113)

Inc/(dec) in equity

223

(559)

Inc/(dec) in minority int.

(19,923)

(18,415)

(19,993)

(19,821)

(21,382)

Dividends

16,976

14,629

10,202

5,484

6,406

Cash flow from finan. actv.

(2,664)

(4,459)

(9,735)

(14,259)

(14,887)

Cash generated/(utilized)

393

1,735

(120)

(121)

Cash at start of the year

1,469

1,862

3,597

3,477

Cash at end of the year

1,862

3,597

3,477

3,356

October 23, 2017

TCS | 2QFY2018 Result Update

Key ratios

Y/E March

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation ratio(x)

P/E (on FDEPS)

23.3

20.9

19.3

19.4

18.0

P/CEPS

24.2

19.4

17.8

17.9

16.6

P/BVPS

8.8

6.9

5.7

5.4

5.0

Dividend yield (%)

1.7

1.6

1.7

1.8

EV/Sales

4.9

4.3

3.8

3.7

3.3

EV/EBITDA

17.5

15.1

13.8

14.0

12.6

EV/Total assets

6.2

5.1

4.3

4.0

3.7

Per share data (`)

EPS

110.9

123.7

134.3

133.2

143.7

Cash EPS

106.8

133.6

145.1

144.4

155.9

Dividend

43.5

40.2

43.6

43.2

46.6

Book value

294

374

451

483

518

Dupont analysis

Tax retention ratio (PAT/PBT)

0.8

Cost of debt (PBT/EBIT)

1.1

EBIT margin (EBIT/Sales)

0.3

0.2

Asset turnover ratio (Sales/Assets)

1.3

1.2

1.1

Leverage ratio (Assets/Equity)

1.3

1.2

Operating ROE

39.1

33.3

29.8

27.6

27.8

Return ratios (%)

RoCE (pre-tax)

33.9

31.6

28.8

26.6

27.0

Angel RoIC

54.0

46.7

50.7

43.0

46.2

RoE

34.2

33.1

29.8

27.6

27.8

Turnover ratios(x)

Asset turnover (fixed assets)

8.2

9.2

10.0

9.7

9.8

Receivables days

October 23, 2017

TCS | 2QFY2018 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

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

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)

October 23, 2017