results review 2qfy20 11 oct 2019 tata consultancy services - 2qfy20 - hdfc sec... · while deal...

RESULTS REVIEW 2QFY20 11 OCT 2019

Tata Consultancy Services NEUTRAL

Growth vectors at riskWe downgrade TCS to NEUTRAL (BUY earlier) and strike it off our list of conviction picks following ~4% EPS cut and a weak growth trajectory (core verticals/ deceleration in digital). Our TP is Rs 1,975 at 20x Sep-21E (24x earlier). HIGHLIGHTS OF THE QUARTER Revenue growth was +8.4% YoY CC (USD rev at

+0.6/5.8% QoQ/YoY), a steep decelerating trajectory following 12.7/10.6% YoY clocked in 4Q-1Q. Digital (33.2% of rev) decelerated (including absolute) to 28% YoY in 2Q (vs. tracking >40% YoY earlier).

While deal bookings have been healthy (USD 6.4bn TCV and book-to-bill at 1.16x), we reckon that higher deal duration distorts the linkage between deal win momentum and revenue growth. Improving deal booking trajectory reflected in NorthAm TCV at USD 3.4bn and BFSI TCV at USD 2.2bn.

Incremental weakness in Retail & CPG vertical (14.8% of rev) and Regional markets segment (20.6% of rev), continued softness in BFSI (31% of rev) has led to deceleration. Near-term headwinds in core verticals expected to persist. Limited positives comprised

strong growth in large client bucket and continued traction in Europe (growth skew a risk).

EBIT% was flat QoQ (-14bps) at 24%. Flattish margin performance resulted from the twin impact of growth slowdown and accelerated hiring (highest-ever 3M and 6M headcount addition at 14k/26k over 3M/6M). Adverse cross-currency (high exposure to GBP/EUR) also impacted margins. We reckon that margin trajectory will improve ‘gradually’ (factored EBIT% at 24.2/24.5/25.0 for FY20/21/22E) supported by a protracted growth recovery and slight moderation in sub-con.

STANCE TCS’ trinity of ‘growth’, scale and durability is challenged and we find our conviction displaced. While multiple attributes of scale/durability (offshore-leverage in digital, attrition) remain intact, the impact of macros and client specifics across core verticals dent the growth outlook. We expect USD rev/EPS CAGR of 8.2/7.7% over FY19-22E, factoring USD rev growth of 6.3/9.0/9.4% for FY20/21/22E. In its downward drift however, strong payout policy (80-100% of FCF) and industry-leading margins/RoIC offer respite to valuations.

Financial Summary YE March (Rs bn) 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) FY18 FY19 FY20E FY21E FY22E Net Revenues 389.77 368.54 5.8 381.72 2.1 1,231.04 1,464.63 1,565.24 1,732.92 1,936.10 EBIT 93.61 97.71 (4.2) 92.20 1.5 305.02 374.50 378.16 425.18 484.35 APAT 80.42 79.01 1.8 81.31 (1.1) 258.26 314.72 320.97 348.62 393.12 Diluted EPS (Rs) 21.4 21.1 1.8 21.7 (1.1) 68.8 83.9 85.5 92.9 104.8 P/E (x) 29.1 23.9 23.4 21.6 19.1 EV / EBITDA (x) 22.4 18.3 17.3 15.5 13.7 RoE (%) 30.1 36.1 35.3 37.1 40.0 Source: Company, HDFC sec Inst Research # Consolidated

INDUSTRY IT CMP (as on 10 Oct 2019) Rs 2,004 Target Price Rs 1,975 Nifty 11,235 Sensex 37,880 KEY STOCK DATA Bloomberg TCS IN No. of Shares (mn) 3,752 MCap (Rs bn) / ($ mn) 7,521/105,858 6m avg traded value (Rs mn) 6,136 STOCK PERFORMANCE (%) 52 Week high / low Rs 2,296/1,784 3M 6M 12M Absolute (%) (4.9) (1.8) (1.9) Relative (%) (3.2) 0.1 (10.9) SHAREHOLDING PATTERN (%) Jun-19 Sep-19 Promoters 72.05 72.05 FIs & Local MFs 7.87 8.21 FPIs 15.88 15.52 Public & Others 4.20 4.22 Pledged Shares 1.53 1.53 Source : BSE

Apurva Prasad [email protected] +91-22-6171-7327 Amit Chandra [email protected] +91-22-6171-7345 Akshay Ramnani [email protected] +91-22-6171-7334

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

TATA CONSULTANCY SERVICES: RESULTS REVIEW 2QFY20

Quarterly Consolidated Financials Snapshot Particulars (Rs bn) 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) Net Revenues (USD mn) 5,517 5,215 5.8 5,485 0.6 Net Revenues 389.77 368.54 5.8 381.72 2.1 Employee Expenses 214.70 195.25 10.0 208.09 3.2 SG&A and Other Operating Expenses 72.82 70.51 3.3 73.26 (0.6) EBITDA 102.25 102.78 (0.5) 100.37 1.9 Depreciation 8.64 5.07 70.4 8.17 5.8 EBIT 93.61 97.71 (4.2) 92.20 1.5 Interest Cost 1.93 1.37 40.9 2.57 (24.9) Other Income 13.61 7.30 86.4 16.75 (18.7) PBT 105.29 103.64 1.6 106.38 (1.0) Minority Interest 0.16 0.26 (38.5) 0.22 (27.3) Tax 24.71 24.37 1.4 24.85 (0.6) RPAT 80.42 79.01 1.8 81.31 (1.1) E/o (adj for tax) - - - APAT 80.42 79.01 1.8 81.31 (1.1) Source: Company, HDFC sec Inst Research Margin Analysis Particulars 2QFY20 2QFY19 YoY (bps) 1QFY20 QoQ (bps) Employee Expenses % Net Revenues 55.1 53.0 210 54.5 57 SG&A and Other Expenses % Net Revenues 18.7 19.1 (45) 19.2 (51) EBITDA Margin (%) 26.2 27.9 (166) 26.3 (6) EBIT Margin (%) 24.0 26.5 (250) 24.2 (14) Tax Rate (%) 23.5 23.5 (5) 23.4 11 APAT Margin (%) 20.6 21.4 (81) 21.3 (67) Source: Company, HDFC sec Inst Research

Revenue came at USD 5,517mn, 0.6/5.8% QoQ/YoY In Constant currency terms revenue grew 8.4% YoY CC (Accenture at 7.2%) Digital (33.2% of rev) grew at 27.9% YoY CC (vs. 42% YoY CC in 1QFY20) EBIT margin came at 24.0% -14bps QoQ, higher employee cost (-57bps) on Variable payouts was offset by lower SG&A (+51bps) TCS announced a special dividend of Rs 40 per share along with an interim dividend of Rs 5 per share, in-line with their capital allocation policy Page | 2


QoQ Revenue Growth Trajectory (%) YoY CC Revenue Growth Trajectory (%)

Source: Company, HDFC sec Inst Research


EBIT Margin Trajectory (%) Digital % Of Revenue

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

QoQ growth was slowest in past 11 qtrs and YoY CC lowest in last six quarters Deceleration in YoY CC revenue growth from 4QFY19 EBIT margin has stabilized at 24% -14bps QoQ, we expect margins to expand hereon given upfront investment in employees (strong net additions of ~26.4K in 1HFY20 vs. 29.2K in FY19) Digital stood at 33.2% of revenue but the growth slowed down to 27.9% YoY CC vs. 42.1% YoY in CC in 1QFY20, slowdown in Digital comes on a high base and pressure in Retail and CPG vertical

3.5

3.0

1.5

3.7

0.3

0.3 1.

5 3.1

3.2

1.0

3.9

1.6

3.2

0.7

2.8

1.6

0.6

0 2 4 6 8

10 12 14 16 18 20

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

174Q

FY17

1QFY

182Q

FY18

3QFY

184Q

FY18

1QFY

192Q

FY19

3QFY

194Q

FY19

1QFY

202Q

FY20

(%, QoQ)

15.8

12

.0

9.9 10

.4

10.1

7.

0 8.6

7.5

6.3 7.

1 6.

2 7.2

9.3

11.5

12.1

12

.7

10.6

8.

4

0

4

8

12

16

20

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

174Q

FY17

1QFY

182Q

FY18

3QFY

184Q

FY18

1QFY

192Q

FY19

3QFY

194Q

FY19

1QFY

202Q

FY20

(%, YoY CC)

26.3

27.1

26

.6

26.1

25

.1 26

.0

26.0

25

.7

23.4

25

.1

25.2

25

.4

25.0

26

.5

25.6

25

.1

24.2

24

.0

22

23

24

25

26

27

28

29

30

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

174Q

FY17

1QFY

182Q

FY18

3QFY

184Q

FY18

1QFY

192Q

FY19

3QFY

194Q

FY19

1QFY

202Q

FY20

(%)

12.5

13

.3

13.7

15

.5

15.9

16

.1

16.8

17

.9

18.9

19

.7

22.1

23

.8

25.0

28

.0

30.1

31

.0

32.2

33

.2

0

5

10

15

20

25

30

35

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

174Q

FY17

1QFY

182Q

FY18

3QFY

184Q

FY18

1QFY

192Q

FY19

3QFY

194Q

FY19

1QFY

202Q

FY20

(%)

Page | 3


TCS vs. Accenture: Revenue Growth (% YoY CC) TCS vs. Accenture: EBIT Margin (%) Trend

Source: Company, HDFC sec Inst Research, Accenture Aug YE


TCS vs. Accenture: Deal TCV (USD bn) Trend TCS vs. Accenture: Deals Book to Bill (x) Trend


TCS superior to Accenture (including inorganic) both in terms of revenue growth and EBIT margin profile, but rev growth converging TCS’ deal bookings were strong but witnessing increase in deal size and duration of deals, Accenture had stronger wins in outsourcing TCS’ deal TCV in 2Q was USD 6.4bn (book-to-bill of 1.16 vs. to book-to-bill of 1.4 for Accenture’s outsourcing business) TCS’ BFSI TCV was USD 2.2bn (book-to-bill of 1.29) and NorthAm TCV was USD 3.4bn (book-to-bill of 1.22) Accenture’s deal TCV of USD 12.9bn included Consulting at USD 6.0bn (book-to-bill of 0.98) and Outsourcing at USD 6.9bn (book-to-bill of 1.4)

6.3 7.1

6.2 7.2

9.3

11.5 12.1

12.7

10.6

8.4 7

8

10 1011 11

9.59 8.4

7.2

0

2

4

6

8

10

12

14

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

TCS Accenture(%)

25.1 25.2 25.4 25.0 26.5 25.6 25.1 24.2 24.0

14.2 15.213.1

15.1 13.815.4

13.315.5 14.2

0

5

10

15

20

25

30

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

TCS Accenture(%)

4.9

4.9 5.

9 6.2

5.7 6.4

11.8

10.8

10.2

11.8

10.6

12.9

0

2

4

6

8

10

12

14

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

TCS Accenture(USD bn)

0.97

0.94

1.12

1.15

1.04

1.16

1.10

1.03

0.96

1.13

0.95

1.17

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

TCS Accenture(x)

Page | 4


TCS vs. Accenture: NorthAm Growth (% YoY) Trend TCS vs. Accenture: Europe Growth (% YoY) Trend



TCS vs. Accenture: BFSI Growth Trend (% YoY) TCS vs. Accenture: Attrition Trend (%)


TCS continued to witness slowdown in NorthAm vs. stable growth for Accenture in the geography TCS’ performance in Europe has been consistently strong but heightened macro weakness adds risk to this growth TCS posted superior growth in BFSI (vs. Accenture) for the past 5 qtrs Stable and industry best attrition for TCS at 11.6% vs. 19% for Accenture

3.53.6

2.8

4.9

78.1 8.2

9.9

7.7

5.33.04.0

7.08.0

11.0 11.010.0

8.0

9.08.0

0

2

4

6

8

10

12

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

TCS Accenture(%)

6.39.2 8.2

10.7

18.7 22.825.1

21.316

13.316.5 18.2

22.319.1 18.6 17.4 17.6 17.5

15

16

9.0 10.0 11.0 10.0 9.0 8.06.0 7.0

5.0 4.0

0

5

10

15

20

25

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

TCS UK TCS Continental EuropeAccenture Europe

(%)

5.1 4.70.2 2.9

4.1

6.1

8.6

11.6

9.28.06.0 9.0

11.0

7.08.0

3.0 1.02.0

4.0 4.0

0

2

4

6

8

10

12

14

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

TCS Accenture(%)

11.6 11.3 11.1 11 10.9 10.9 11.2 11.3 11.5 11.6

15.0 15.013.0 13.0

17.018.0

15.0 15.0

18.019.0

0 2 4 6 8

10 12 14 16 18 20

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

TCS Accenture(%)

Page | 5


Vertical Revenue Break-up (% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 BFSI 32.6 31.6 31.1 31.1 31.2 30.8 30.9 30.8 31.0 Regional Markets & Others 17.6 17.4 18.0 19.9 20.4 20.7 21.3 20.8 20.6 Retail & CPG 15.9 16.7 16.6 15.4 15.4 15.5 15.1 15.0 14.8 Manufacturing 7.4 7.5 7.4 10.2 9.8 9.8 9.6 9.8 9.8 Technology & Services 8.0 7.9 7.8 9.0 8.9 8.7 8.6 8.8 8.7 Life Sciences & Healthcare 7.2 7.3 7.2 7.3 7.5 7.6 7.7 7.9 8.1 Communication & Media 7.1 7.1 7.1 7.1 6.8 6.9 6.8 6.9 7.0 Energy & Utilities 4.2 4.5 4.8 NA NA NA NA NA NA Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC Sec Inst Research

Vertical-wise Revenue Growth (QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 BFSI NA NA NA NA 3.6 (0.6) 3.1 1.3 1.2 Regional Markets & Others NA NA NA NA 5.8 2.2 5.8 (0.8) (0.4) Retail & CPG NA NA NA NA 3.2 1.3 0.1 1.0 (0.8) Manufacturing NA NA NA NA (0.8) 0.7 0.7 3.7 0.6 Technology & Services NA NA NA NA 2.1 (1.6) 1.6 4.0 (0.6) Life Sciences & Healthcare NA NA NA NA 6.1 2.0 4.2 4.3 3.1 Communication & Media NA NA NA NA (1.1) 2.2 1.3 3.1 2.0 Energy & Utilities NA NA NA NA NA NA NA NA NA Total 3.2 1.0 3.9 1.6 3.2 0.7 2.8 1.6 0.6 Source: Company, HDFC Sec Inst Research

Vertical-wise Revenue Growth (Constant Currency) (YoY, % CC) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 BFSI 4.7 0.2 2.9 4.1 6.1 8.6 11.6 9.2 8.0 Regional Markets & Others 6.9 2.2 1.8 11.8 19.8 22.6 20.8 16.9 9.3 Retail & CPG (1.4) 3.0 8.4 12.7 15.6 10.5 9.9 7.9 4.8 Manufacturing 9.6 9.5 8.6 6.9 6.9 6.7 9.2 5.5 7.8 Technology & Services 10.1 9.6 7.7 6.7 5.8 5.8 6.0 7.8 5.6 Life Sciences & Healthcare 10.3 13.5 12.6 12.1 14.7 15.7 18.2 18.1 16.0 Communication & Media 9.5 16.9 8.9 9.5 8.0 10.8 10.0 8.4 11.8 Energy & Utilities 22.7 29.4 33.7 30.9 22.2 18.1 11.3 NA NA Total 7.1 6.2 7.2 9.3 11.5 12.1 12.7 10.6 8.4 Source: Company, HDFC Sec Inst Research, data reclassified from 1QFY19 thus time series YoY growth is not comparable

BFSI (31% of rev) growth has been soft for two consecutive qtrs impacted by challenges in NorthAm Capital markets and Large European Banks Retail & CPG growth has been soft for three straight qtrs impacted by macro weakness and industry disruption Strong growth in Life sciences & Healthcare for the fourth consecutive quarter, life-sciences growth is on drug development projects at large Pharma companies

Page | 6


Geographic Revenue Break-up (% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 Americas 54.1 54.2 52.2 52.9 53.1 53.2 52.7 52.4 52.5 North America 51.9 52.0 50.2 51.0 51.1 51.2 50.7 50.6 50.6 Latin America 2.2 2.2 2.0 1.9 2.0 2.0 2.0 1.8 1.9 Europe 27.4 27.6 29.4 29.5 29.6 29.6 30.0 30.1 30.2 UK 14.0 14.1 15.2 15.5 15.6 15.5 15.9 15.8 15.6 Continental Europe 13.4 13.5 14.2 14.0 14.0 14.1 14.1 14.3 14.6 Asia-Pacific 9.8 9.5 9.7 9.6 9.6 9.4 9.5 9.4 9.4 India 6.3 6.3 6.2 5.8 5.6 5.7 5.8 6.0 5.7 Middle East and Africa 2.4 2.4 2.5 2.2 2.1 2.1 2.0 2.1 2.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC Sec Inst Research Geographic Revenue Growth (QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 Americas 2.3 1.2 0.0 3.0 3.6 0.9 1.8 1.1 0.8 North America 2.0 1.2 0.3 3.2 3.4 0.9 1.8 1.4 0.6 Latin America 8.1 1.0 (5.6) (3.5) 8.7 0.7 2.8 (8.5) 6.2 Europe 7.1 1.8 10.6 1.9 3.6 0.7 4.2 2.0 0.9 UK 4.0 1.7 12.0 3.6 3.9 0.0 5.5 1.0 (0.7) Continental Europe 10.7 1.8 9.3 0.2 3.2 1.4 2.8 3.1 2.7 Asia-Pacific 6.5 (2.1) 6.1 0.5 3.2 (1.4) 3.9 0.6 0.6 India (7.1) 1.0 2.2 (5.0) (0.3) 2.5 4.6 5.1 (4.4) Middle East and Africa (0.9) 1.0 8.2 (10.6) (1.4) 0.7 (2.1) 6.7 5.4 Total 3.2 1.0 3.9 1.6 3.2 0.7 2.8 1.6 0.6 Source: Company, HDFC Sec Inst Research Geographic Revenue Growth (Constant Currency) (YoY, % CC) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 North America 3.6 2.8 4.9 7.0 8.1 8.2 9.9 7.7 5.3 Latin America 13.6 5.4 5.0 5.2 6.8 7.6 16.2 6.4 7.3 UK 9.2 8.2 10.7 18.7 22.8 25.1 21.3 16.0 13.3 Continental Europe 18.2 22.3 19.1 18.6 17.4 17.6 17.5 15.0 16.0 Asia-Pacific 4.1 6.2 8.6 10.8 12.5 12.6 11.5 9.5 6.5 India 14.3 4.1 (2.3) (4.7) 7.4 9.7 11.3 15.9 7.7 Middle East and Africa 7.6 3.7 2.2 (3.6) (4.4) (3.3) (4.0) 6.4 7.3 Total 7.1 6.2 7.2 9.3 11.5 12.1 12.7 10.6 8.4 Source: Company, HDFC Sec Inst Research

Growth was soft across geographies except in Continental Europe (+2.7% QoQ), heightening macro challenges adds risk to growth for this geography Deceleration in YoY CC growth trend in NorthAm Europe geo has been strong growth contributor for TCS (+17.3% in FY19) but YoY growth rate in Europe particularly in UK is now normalizing

Page | 7


Client Metrics (Nos) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20

>$ 1 mn clients 933 941 963 978 989 996 1,008 1,014 1,032

>$ 5 mn clients 470 485 495 508 513 519 532 551 554

>$ 10 mn clients 328 337 350 355 365 370 371 384 398

>$ 20 mn clients 196 203 207 206 213 211 215 219 225

>$ 50 mn clients 91 94 97 97 98 99 99 100 101

>$ 100 mn clients 37 37 38 40 44 45 44 44 47 Source: Company, HDFC sec Inst Research

Large account performance was strong with 3 sequential additions in >$ 100mn client bucket Steady working capital with DSO (including unbilled) at 83 days (vs. 82 days at FY19)

Page | 8


Change In Estimates Particulars Earlier estimates Revised estimates % change FY20E Revenue (USD mn) 22,606 22,237 (1.6) Revenue (Rs bn) 1,588.78 1,565.24 (1.5) EBIT (Rs bn) 390.40 378.16 (3.1) EBIT margin (%) 24.6 24.2 (41)bps EPS (Rs) 87.4 85.5 (2.2)

FY21E Revenue (USD mn) 24,868 24,237 (2.5) Revenue (Rs bn) 1,778.04 1,732.92 (2.5) EBIT (Rs bn) 447.45 425.18 (5.0) EBIT margin (%) 25.2 24.5 (63)bps EPS (Rs) 97.3 92.9 (4.5)

FY22E Revenue (USD mn) 27,234 26,522 (2.6) Revenue (Rs bn) 1,988.06 1,936.10 (2.6) EBIT (Rs bn) 510.40 484.35 (5.1) EBIT margin (%) 25.7 25.0 (66)bps EPS (Rs) 109.9 104.8 (4.7) Source: HDFC sec Inst Research Key Assumptions Particulars FY16 FY17 FY18 FY19 FY20E FY21E FY22E Volume Growth (%) 8.6 7.1 8.5 6.4 7.0 8.8 7.4 Pricing Change (%) (1.5) (0.8) 0.1 3.0 (0.7) 0.1 1.9 USD Revenue Growth (%) 7.1 6.2 8.6 9.6 6.3 9.0 9.4 USD/INR Rate 65.67 67.12 64.49 70.03 70.39 71.50 73.00 EBIT Margin (%) 26.5 25.7 24.8 25.6 24.2 24.5 25.0 Source: Company, HDFC Sec Inst Research

TCS’ valuation premium over INFY expected to converge with increasing growth divergence TCS’ valuations similar to industry leader Accenture now Lower FY21/22E rev est by 2.5/2.6% and margins by 63/66bps respectively

Page | 9


Peer Set Comparison

Company MCap (Rs bn)

CMP (Rs)

TP (Rs) RECO

EPS (Rs) P/E (x) RoE (%)

FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E

TCS 7,521 2,004 1,975 NEU 68.8 83.9 85.5 92.9 29.1 23.9 23.4 21.6 30.1 36.1 35.3 37.1 Infosys 3,335 783 835 NEU 34.6 37.2 38.1 43.7 22.6 21.1 20.6 17.9 22.0 24.4 25.3 27.9 Wipro 1,364 239 222 NEU 14.0 15.8 16.6 17.8 17.0 15.2 14.4 13.5 16.5 17.3 16.9 16.9 HCL Tech 1,442 1,064 1,275 BUY 64.7 74.6 73.1 83.7 16.4 14.3 14.5 12.7 25.3 26.0 22.6 23.2 TechM 626 711 650 NEU 43.2 48.9 45.4 51.0 16.5 14.6 15.7 14.0 21.5 22.0 19.4 20.0 Tier-1 IT Median 17.0 15.2 15.7 14.0 22.0 24.4 22.6 23.2

LTI 256 1,474 1,835 BUY 66.9 87.3 83.6 95.1 22.0 16.9 17.6 15.5 33.2 34.6 27.4 26.9 Mphasis 169 909 1,180 BUY 45.4 57.6 58.3 69.1 20.0 15.8 15.6 13.2 14.6 20.0 19.7 20.9 LTTS 159 1,530 1,960 BUY 45.5 68.0 78.4 92.9 33.6 22.5 19.5 16.5 27.7 32.0 29.8 29.4 Mindtree 119 725 755 NEU 32.3 44.2 36.4 49.1 22.4 16.4 19.9 14.8 21.4 24.9 17.3 23.4 Hexaware * 106 357 450 BUY 16.8 19.6 20.4 24.6 21.3 18.2 17.5 14.5 26.6 26.5 23.5 24.4 Cyient 51 456 490 NEU 38.6 43.6 39.8 42.7 11.8 10.4 11.5 10.7 18.1 19.5 16.6 16.2 Zensar 46 201 295 BUY 10.6 14.1 15.5 19.1 18.9 14.3 12.9 10.5 15.1 17.3 16.7 17.8 Persistent 44 567 655 BUY 42.0 47.5 43.3 47.5 13.5 11.9 13.1 11.9 16.0 15.7 13.8 14.7 Tata Elxsi 39 619 645 NR 38.5 46.6 33.1 41.3 16.1 13.3 18.7 15.0 37.0 34.5 20.5 22.2 Sonata 31 294 448 BUY 18.6 24.0 26.5 29.9 15.8 12.3 11.1 9.8 31.0 35.1 33.7 33.8 Intellect 24 182 315 BUY 3.5 7.7 7.6 11.7 NM 23.8 24.1 15.6 6.7 11.1 9.3 12.8 eClerx 15 398 460 NEU 74.0 61.7 50.1 51.2 5.4 6.4 7.9 7.8 24.1 17.6 13.8 14.1 Majesco 12 429 700 BUY (1.5) 18.3 20.9 31.1 NM 23.4 20.6 13.8 NM 8.4 8.3 11.4 HGS 12 566 760 NR 96.5 84.6 85.3 101.2 5.9 6.7 6.6 5.6 10.5 8.5 11.2 11.8 Mastek 7 302 530 BUY 27.7 40.4 39.2 45.2 10.9 7.5 7.7 6.7 13.7 16.1 13.2 13.7 Tier-2 IT Median 16.1 14.3 15.6 13.2 19.8 19.5 16.7 17.8

Company

MCap CMP (USD) TP RECO

EPS (USD) P/E (x) RoE (%) (USD bn) FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E

Accenture 118 184 NA NR 5.6 6.5 7.8 8.6 33.1 28.5 23.6 21.5 41.7 42.0 34.9 35.0 Cognizant 33 60 NA NR 2.5 3.6 4.0 4.3 23.5 16.6 15.1 13.9 14.1 19.0 19.0 20.4 Capgemini^ 20 107 NA NR 4.9 4.4 6.5 7.2 22.0 24.6 16.4 15.0 11.5 10.1 13.4 13.6 Global IT Median 23.5 24.6 16.4 15.0 14.1 19.0 19.0 20.4 Source: HDFC sec Inst Research, Bloomberg, *Dec YE, TP implies fair value for Tata Elxsi, HGS, ^CMP and EPS in EUR terms

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Consolidated Income Statement Year ending March (Rs bn) FY18 FY19 FY20E FY21E FY22E

Net Sales (USD mn) 19,089 20,913 22,237 24,237 26,522

Growth (%) 8.6 9.6 6.3 9.0 9.4

Net Sales 1,231.04 1,464.63 1,565.24 1,732.92 1,936.10

Growth (%) 4.4 19.0 6.9 10.7 11.7

Employee Expenses 663.96 782.46 863.49 957.82 1,063.50

SG&A and Other Operating Expenses 241.92 287.11 291.10 316.61 353.73

EBIDTA 325.16 395.06 410.65 458.49 518.87

Depreciation 20.14 20.56 32.50 33.30 34.52

EBIT 305.02 374.50 378.16 425.18 484.35

EBIT (%) 24.8 25.6 24.2 24.5 25.0

EBIT Growth (%) 0.6 22.8 1.0 12.4 13.9

Other Income 36.42 43.11 51.81 43.26 42.08

Interest 0.52 1.98 8.36 8.82 8.14

PBT 340.92 415.63 421.61 459.63 518.29

Tax (incl deferred) 82.12 100.01 99.95 110.31 124.39

Minority Interest and associate profit 0.54 0.90 0.70 0.69 0.78

RPAT 258.26 314.72 320.97 348.62 393.12

APAT 258.26 314.72 320.97 348.62 393.12

APAT Growth (%) (1.8) 21.9 2.0 8.6 12.8

EPS (Rs) 68.8 83.9 85.5 92.9 104.8

EPS Growth (%) (1.8) 21.9 2.0 8.6 12.8 Source: Company, HDFC sec Inst Research

Consolidated Balance Sheet Year ending March (Rs bn) FY18 FY19 FY20E FY21E FY22E

SOURCES OF FUNDS Share Capital - Equity 1.91 3.75 3.75 3.75 3.75

Reserves 849.37 890.71 918.99 952.41 1,007.82

Total Shareholders' Funds 851.28 894.46 922.74 956.16 1,011.57

Minority Interest 4.02 4.53 5.59 6.28 7.06

Total Debt 2.35 0.44 0.44 0.44 0.44

Net Deferred Taxes (22.79) (16.14) (16.14) (16.14) (16.14)

Long Term Provisions & Others 17.14 18.74 18.74 18.74 18.74

TOTAL SOURCES OF FUNDS 852.00 902.03 931.37 965.49 1,021.67

APPLICATION OF FUNDS Net Block 102.16 104.11 128.13 137.94 145.83

CWIP 12.78 9.63 9.63 9.63 9.63 Goodwill & Other Intangible Assets 17.57 18.79 19.80 19.42 19.79

Investments 3.01 2.39 2.39 2.39 2.39

Other non-current assets 79.77 65.69 65.96 66.41 66.95

Total Non Current Assets 215.29 200.61 225.90 235.78 244.59

Cash & Equivalents 428.68 419.39 409.29 409.97 428.79

Debtors 250.37 274.41 293.19 324.50 362.44

Other Current Assets 134.13 228.46 232.00 237.91 245.06

Total Current Assets 384.50 502.87 525.20 562.41 607.50

Creditors 50.94 62.92 67.24 74.45 83.17

Other Current Liabilities & Provns 125.53 157.92 161.79 168.23 176.03

Total Current Liabilities 176.47 220.84 229.03 242.67 259.21

Net Current Assets 208.03 282.03 296.17 319.74 348.29

TOTAL APPLICATION OF FUNDS 852.00 902.03 931.37 965.49 1,021.67 Source: Company, HDFC sec Inst Research

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Consolidated Cash Flow Year ending March (Rs bn) FY18 FY19 FY20E FY21E FY22E

Reported PBT 340.92 415.63 421.61 459.63 518.29

Non-operating & EO items (32.73) (30.97) (39.53) (32.88) (31.98)

Interest expenses 0.52 1.98 8.36 8.82 8.14

Depreciation 20.14 20.56 32.50 33.30 34.52

Working Capital Change (2.09) (21.69) (14.14) (23.57) (28.55)

Tax paid (76.09) (99.58) (99.95) (110.31) (124.39)

OPERATING CASH FLOW ( a ) 250.67 285.93 308.85 334.99 376.02

Capex (18.62) (22.31) (56.51) (43.11) (42.41)

Free cash flow (FCF) 232.05 263.62 252.34 291.88 333.61

Investments (0.43) (0.62) - - -

Non-operating income 32.73 30.97 39.53 32.88 31.98

INVESTING CASH FLOW ( b ) 13.68 8.04 (16.98) (10.23) (10.43)

Debt Issuance (0.36) (1.91) - - -

Interest expenses (0.52) (1.98) (8.36) (8.82) (8.14)

FCFE 231.17 259.73 243.98 283.06 325.47

Share capital Issuance - - - - -

Dividend/buyback (268.02) (275.17) (292.69) (315.20) (337.71)

FINANCING CASH FLOW ( c ) (268.90) (279.06) (301.05) (324.02) (345.86)

NET CASH FLOW (a+b+c) (4.55) 14.91 (9.18) 0.74 19.74

Closing Cash & Equivalents 428.68 419.39 409.29 409.97 428.79 Source: Company, HDFC sec Inst Research

Key Ratios

FY18 FY19 FY20E FY21E FY22E PROFITABILITY (%) EBITDA Margin 26.4 27.0 26.2 26.5 26.8 APAT Margin 21.0 21.5 20.5 20.1 20.3 RoE 30.1 36.1 35.3 37.1 40.0 RoIC or Core RoCE 37.5 46.3 45.6 50.5 56.6 RoCE 30.2 36.1 35.7 37.5 40.2 EFFICIENCY Tax Rate (%) 24.1 24.1 23.7 24.0 24.0 Fixed Asset Turnover (x) 5.4 6.0 5.4 5.7 6.1 Debtors (days) 74 68 68 68 68 Other Current Asset (days) 40 57 54 50 46 Payables (days) 15 16 16 16 16 Other Current Liab & Prov (days) 37 39 38 35 33 Cash Conversion Cycle (days) 62 70 69 67 66 Net Debt/EBITDA (x) (0.8) (0.7) (1.0) (0.9) (0.8) Net Debt/Equity (x) (0.3) (0.3) (0.4) (0.4) (0.4) Interest Coverage (x) 587 189 45 48 59 PER SHARE DATA EPS (Rs/sh) 68.8 83.9 85.5 92.9 104.8 CEPS (Rs/sh) 74.2 89.4 94.2 101.8 114.0 DPS (Rs/sh) 26.0 30.0 65.0 70.0 75.0 BV (Rs/sh) 227 238 246 255 270 VALUATION P/E 29.1 23.9 23.4 21.6 19.1 P/BV 8.8 8.4 8.2 7.9 7.4 EV/EBITDA 22.4 18.3 17.3 15.5 13.7 OCF/EV (%) 3.4 4.1 4.3 4.8 5.4 FCF/EV (%) 3.2 3.8 3.5 4.2 4.8 FCFE/mkt cap (%) 3.1 3.6 3.2 3.8 4.4 Dividend Yield (%) 1.3 1.5 3.2 3.5 3.7


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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 10-Oct-18 2,044 BUY 2,400 30-Nov-18 1,959 BUY 2,400 8-Jan-19 1,894 BUY 2,460

11-Jan-19 1,889 BUY 2,430 1-Apr-19 2,002 BUY 2,385 9-Apr-19 2,070 BUY 2,385

13-Apr-19 2,014 BUY 2,410 5-Jul-19 2,163 BUY 2,470

10-Jul-19 2,133 BUY 2,420 27-Aug-19 2,276 BUY 2,420 22-Sep-19 2,066 BUY 2,420 4-Oct-19 2,060 BUY 2,480

11-Oct-19 2,004 NEU 1,975

RECOMMENDATION HISTORY

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

Oct

-18

Nov-

18

Dec-

18

Jan-

19

Feb-

19

Mar

-19

Apr-

19

May

-19

Jun-

19

Jul-1

9

Aug-

19

Sep-

19

Oct

-19

TCS TP

HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,Mumbai - 400 013 Board : +91-22-6171-7330 www.hdfcsec.com

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