1QFY2018 Result Update | IT

July 18, 2017

Tata Consultancy Services (TCS)

ACCUMULATE

CMP

`2,399

Performance highlights

Target Price

`2,651

(` cr)

1QFY18

4QFY17

% chg (qoq)

1QFY17

% chg (yoy)

Investment Period

12 Months

Net revenue

29,584

29,642

(0.2)

29,305

1.0

Adj. EBITDA

7,065

8,147

(13.3)

7,971

(11.4)

Stock Info

Adj. EBITDA margin (%)

25.1

27.5

(243.1)

27.2

(168.9)

Sector

Adj. PAT

5,945

6,608

(10.0)

6,317

(5.9)

Market Cap (` cr)

4,58,606

Source: Company, Angel Research

Net Debt (` cr)

-45,288

For 1QFY2018, TCS posted below expectation results on the EBIT and net profit fronts. The

Beta

0.6

company posted

3.1% sequential growth in USD revenues to US$4,591mn v/s.

52 Week High / Low

2,834/2,055

US$4,585mn expected, mostly volume lead (3.5% qoq growth). On Constant Currency

Avg. Daily Volume

1,10,516

terms, the company posted a 2.0% qoq growth. On profitability, the EBIT margins came in

Face Value (`)

at 23.4% v/s. 24.2% expected, posting a qoq dip of 236bps. Impact of wage hikes and

BSE Sensex

32,021

visa expenses, apart from rupee appreciation were the major drags on profitability.

Nifty

9,886

Consequently, PAT came in at `5,945cr v/s. `6,275cr expected, de-growth of 10.0% qoq.

Reuters Code

TCS.BO

We maintain our Accumulate rating with a target price of `2,651.

Bloomberg Code

TCS@IN

Quarterly highlights: Company posted 3.1% sequential growth in USD revenues to

US$4,591mn v/s. US$4,585mn expected, mostly volume lead (3.5% qoq growth). On

Shareholding Pattern (%)

Constant Currency terms, the company posted a 2.0% qoq growth. In terms of geography,

Promoters

73.6

Latin America and Continental Europe posted a qoq growth of

2.8% and

5.9%

MF / Banks / Indian Fls

5.5

respectively. Its key market USA posted a qoq growth of 1.7%. India and Asia Pacific

FII / NRIs / OCBs

17.0

posted a qoq growth of 1.5% and 1.2% respectively. On profitability, the EBIT margins

Indian Public / Others

4.0

came in at 23.4% v/s. 24.2% expected, posting a qoq dip of 236bps. Impact of wage

hikes and visa expenses, apart from rupee appreciation were the major drags on

profitability. Consequently, PAT came in at `5,945 v/s. `6,275cr expected, de-growth of

Abs.(%)

3m 1yr

3yr

10.0% qoq. On operational front, the LTM attrition was at 11.6% in IT Services.

Sensex

28.0

14.6

29.0

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

TCS

(1.1)

(4.8)

4.1

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

Also, on the EBIT front the company is confident of managing the EBIT margins in the

3-Year Daily Price Chart

range of 26-28%. We expect TCS to post revenue CAGR of 8.5% in USD as well as INR

3,000

terms over FY2017-19E. Hence, maintain our Accumulate recommendation.

2,500

Key financials (Consolidated, IFRS)

2,000

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

1,500

Net sales

1,08,646

1,17,966

1,27,403

1,38,870

1,000

% chg

14.8

8.6

8.0

9.0

500

Net profit

24,215

26,289

28,272

30,524

% chg

11.6

8.6

7.5

8.0

EBITDA margin (%)

28.3

27.5

27.6

EPS (`)

123.7

134.3

144.5

156.0

Source: Company, Angel Research

P/E (x)

19.4

17.9

16.6

15.4

P/BV (x)

6.4

5.3

4.9

4.6

RoE (%)

33.1

29.8

29.7

29.8

RoCE (%)

31.6

28.8

28.9

29.2

Sarabjit kour Nangra

EV/Sales (x)

4.0

3.6

3.3

3.0

+91 22 3935 7800 Ext: 6806

sarabjit @angelbroking.com

EV/EBITDA (x)

14.3

13.0

12.1

10.9

Source: Company, Angel Research; Note: CMP as of July 14, 2017

Please refer to important disclosures at the end of this report

TCS | 1QFY2018 Result Update

Exhibit 1: 1QFY2018 performance (Consolidated, IFRS)

(` cr)

1QFY2018

4QFY2017

% chg (qoq)

1QFY2017

% chg (yoy)

FY2017

FY2016

% chg(yoy)

Net revenue

29,584

29,642

(0.2)

29,305

1.0

1,17,966

1,08,646

8.6

Cost of revenue

16,792

16,153

4.0

16,312

2.9

65,402

59,459

10.0

Gross profit

12,792

13,489

(5.2)

12,993

(1.5)

52,564

49,187

6.9

SG&A expense

5,379

5,342

0.7

5,156

4.3

20,755

18,956

9.5

EBITDA

7,413

8,147

(9.0)

7,837

(5.4)

31,809

30,231

5.2

Dep. and amortisation

499

520

(4.0)

490

1.8

1,485

1,441

3.1

EBIT

6,914

7,627

(9.3)

7,347

(5.9)

30,324

28,790

5.3

Other income

932

989

(5.8)

963

(3.2)

4,189

3,050

37.3

PBT

7,846

8,616

(8.9)

8,310

(5.6)

34,513

31,840

8.4

Income tax

1,896

1,994

(4.9)

1,992

(4.8)

8,156

7,503

8.7

PAT

5,950

6,622

(10.1)

6,318

(5.8)

26,357

24,337

8.3

Earnings in affiliates

Minority interest

123

Reported PAT

5,945

6,608

(10.0)

6,317

(5.9)

26,289

24,215

8.6

Adj. PAT

5,945

6,608

(10.0)

6,317

(5.9)

26,289

24,215

8.6

EPS

30.4

33.7

(10.0)

32.3

(5.9)

133.4

123.2

8.3

Gross margin (%)

43.2

45.5

(227)bp

44.3

(110)bp

44.6

45.3

(71)bp

EBITDA margin (%)

25.1

27.5

(243)bp

26.7

(169)bp

27.0

27.8

(86)bp

EBIT margin (%)

23.4

25.7

(236)bp

25.1

(170)bp

25.7

26.5

(79)bp

Source: Company, Angel Research

Exhibit 2: Actual v/s Angel estimates

(` cr)

Actual

Estimate

Var. (%)

Net revenue

29,584

29,600

(0.1)

EBIT margin (%)

23.4

24.2

(88)bps

Adj. PAT

5,945

6,275

(5.3)

Source: Company, Angel Research

Numbers just in-line with expectations

TCS’ results were below expectations on the EBIT and net profit fronts. The company posted

3.1% sequential growth in USD revenues to US$4,591mn v/s. US$4,585mn expected,

mostly volume lead (3.5% qoq growth). On Constant Currency terms, the company posted a

2.0% qoq growth. In Rupee terms, revenues are expected to come in at `29,548cr v/s.

`29,600cr expected, down 0.2% qoq.

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

segments was, BFSI (2.3% qoq), Retail & CPG (2.0% qoq), Communication & Media (3.9%

qoq), Manufacturing

(3.8% qoq), Life Sciences & Healthcare

(4.7% qoq),

Hi-Tech (3.7% qoq), Energy Utilities (7.6% qoq), Travel & Hospitality (7.0% qoq).

In terms of geography, on CC basis, qoq growth was North America (1.7% qoq), Latin

America (2.8% qoq), UK (0.7% qoq), Continental Europe (5.9% qoq), India (1.5% qoq), Asia

Pacific (1.2% qoq), MEA (0.7% qoq).

July 18, 2017

TCS | 1QFY2018 Result Update

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

3.7

3.5

3.1

3.4

1.7

1.0

1.3

1.5

0.3

-1

1QFY17

2QFY17

0.3

3QFY17

4QFY17

1QFY18

Volume growth

Revenue growth (USD terms)

Source: Company, Angel Research

Exhibit 4: Revenue drivers for 1QFY2018

3.5

3.1

1.5

-1

-2

(1.9)

-3

Volume

Currency impact

CC realization

Total revenue growth

Source: Company, Angel Research

In Communication, weakness was seen in UK, Europe and Asia Pacific, while in

Healthcare, US slowed down. However, both these factors are one-offs. Revenue

from Digital grew by 7.6% qoq, and it now constitutes to 17.9% of total revenue.

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

% to revenue

% chg (CC qoq)

% chg (yoy)

BFSI

32.9

2.3

5.1

Manufacturing

7.5

3.8

10.2

Communication & Media

7.3

3.9

11.6

Life sciences and healthcare

7.1

4.7

10.7

Retail and CPG

12.2

2.0

(3.4)

Transportation & Hospitality

3.5

3.7

16.5

Energy and utilities

4.0

20.3

Technology & Services

7.9

3.7

8.2

Regional Markets & Others

17.6

(3.6)

5.5

Source: Company, Angel Research

July 18, 2017

TCS | 1QFY2018 Result Update

Geography wise growth in INR sales in key geographies was as follows: USA (1.7%

qoq on CC basis), Latin America (2.8% qoq on CC basis), UK (0.7% qoq on CC

basis), India (1.5% qoq on CC basis), and MEA (0.7% qoq on CC basis). However,

Continental Europe and Asia Pacific posted growth of 5.9% qoq and 1.2% qoq on

CC basis respectively.

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

% of revenue

% chg (CC qoq)

% chg (yoy)

U.S.

52.5

1.7

3.5

Latin America

2.1

2.8

8.0

U.K.

13.9

0.7

6.3

Continental Europe

12.5

5.9

16.5

India

7.0

1.5

13.3

Asia Pacific

9.5

1.2

4.7

MEA

2.5

0.7

8.9

Source: Company, Angel Research

Attrition rate appreciates

In 1QFY2018, TCS witnessed a gross addition of 11,202 employees and net

addition of (1,414) employees, taking its total employee base to 3,85,809. During

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

increased to 12.5% from 11.5% in 4QFY2017.

Exhibit 7: Hiring and attrition trend

Particulars

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

Gross addition

17,792

22,665

18,362

20,093

11,202

Net addition

8,236

9,440

6,978

8,726

(1,414)

Total employee base

3,62,079

3,71,519

3,78,497

3,87,223

3,85,809

Attrition (%) - LTM basis

13.6

12.9

12.2

11.5

12.4

Source: Company, Angel Research

Margin dips

On the operating front, the company reported EBITDA and EBIT margins at 25.1%

and 23.4%, i.e. a contraction of 243bps and 236bps qoq respectively. The break

up across cost items is - Employee costs (200bps), Rent expenses (30bps) and

Visas and consultants (30bps). However, for FY2018, the company has guided the

EBIT margins to be in the range of 26-28%.

July 18, 2017

TCS | 1QFY2018 Result Update

Exhibit 8: Adj. Margin profile

27.7

27.5

27.2

26.7

25.1

26.0

25.7

25.1

23.4

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

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$100mn+

revenue band increased by 1 and in US$10mn+ revenue band increased by 12.

TCS won four large deals in BFSI in 1QFY2018, but cited that the pipeline remains

short. The pipeline for Insurance is strong, which can result in a stronger

2HFY2018.

Exhibit 9: Client pyramid

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

US$1mn-5mn

408

410

426

438

441

US$5mn-10mn

141

154

149

142

US$10mn-20mn

119

110

114

120

132

US$20mn-50mn

102

107

106

105

US$50mn-100mn

US$100mn plus

Source: Company, Angel Research

July 18, 2017

TCS | 1QFY2018 Result Update

Investment Argument

Guidance - Cautious optimism: The management refrained from giving any

guidance for FY2018, however it expects a bounce back of the key verticals like

BFSI, Communications and Hi-Tech. Digital also continues to see a good traction.

On EBIT front, the company expects to manage its margins in 26-28% range. 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.

Growth fundamentals intact: Despite the near term uncertainty arising out of Brexit

and new macro dynamics in US, TCS remains optimistic to make a comeback after

current cyclical headwinds are behind. Long term drivers of tech spending will

remain intact and new growth areas are emerging. Strength in Digital bounced

back after seeing some weakness in 2QFY2017. Revenue from Digital grew by

7.6% qoq and it now constitutes to 17.9% of total revenue. Thus, the company has

invested well to reap the benefits over long term.

Outlook and valuation

Over FY2017-19E, we expect TCS to post revenue CAGR of

8.5% in

USD and INR terms. The company highlighted that it stands comfortable of

sustaining the EBIT margin in the range of 26-28%. On the EBIT and PAT fronts,

we expect the company to post

8.7% and

7.8% CAGR over FY2017-19E

respectively. The stock is trading at 15.4x FY2019E EPS of `156. We maintain our

Accumulate recommendation.

Exhibit 10: Key assumptions

FY2018E

FY2019E

Revenue growth (USD)

8.0

9.0

USD-INR rate (realized)

67.1

Revenue growth (`)

8.0

9.0

EBITDA margin (%)

27.6

Tax rate (%)

23.5

EPS growth (%)

7.5

8.0

Source: Company, Angel Research

July 18, 2017

TCS | 1QFY2018 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

1,27,403

1,38,870

Cost of revenue

50,599

58,952

64,764

68,798

74,990

Gross profit

44,049

49,695

53,202

58,606

63,880

% of net sales

46.5

45.7

45.1

46.0

SGA expenses

17,353

18,956

20,755

23,442

25,552

% of net sales

18.3

17.4

17.6

18.4

EBITDA

26,696

30,738

32,447

35,163

38,328

% of net sales

28.2

28.3

27.5

27.6

Dep. and amortization

1272

1948

2123

2293

2500

% of net sales

1.3

1.8

EBIT

25,424

28,790

30,324

32,870

35,828

% of net sales

26.9

26.5

25.7

25.8

Other income, net

3140

3050

4189

Profit before tax

28,564

31,840

34,513

37,059

40,017

Provision for tax

6,083

7,503

8,156

8,709

9,404

% of PBT

21.3

23.6

23.5

PAT

22,481

24,338

26,357

28,350

30,613

Minority interest

205

123

Extra-ordinary (Exp.)/ Inc.

-2627.9

Reported PAT

19,648

24,215

26,289

28,272

30,524

Adj. PAT

21,696

24,215

26,289

28,272

30,524

Diluted EPS (`)

110.9

123.7

134.3

144.5

156.0

July 18, 2017

TCS | 1QFY2018 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

4,500.0

5,000.0

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

1,13,550

1,22,545

Liabilities

Current liabilities

14,428

15,407

14,294

15,288

16,664

Short term borrowings

243

162

218

Redeemable preference shares

(0)

Long term debt

114

Other non current liabilities

1,778

2,017

2,089

2,442

2,662

Minority interest

914

354

366

444

533

Shareholders funds

57,477

73,190

88,315

95,086

1,02,397

Total liabilities

74,954

91,212

1,05,353

1,13,550

1,22,545

July 18, 2017

TCS | 1QFY2018 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

28,350

30,613

Depreciation

1,272

1,948

2,123

2,293

2,500

Exp. (deferred)/written off

160

174

Pre tax cash from oper

23,913

26,460

28,480

30,643

33,113

Other inc./prior period ad

1,272

1,948

2,123

2,293

2,500

Net cash from operations

25,185

28,408

30,604

32,937

35,613

Tax

6,083

7,503

8,156

8,709

9,404

Cash profits

19,102

20,905

22,448

24,228

26,209

(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

14,221

25,207

(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)

(21,501)

(23,213)

Dividends

16,976

14,629

10,202

5,489

6,411

Cash flow from finan. actv.

(2,664)

(4,459)

(9,735)

(15,934)

(16,713)

Cash generated/(utilized)

393

1,735

903

500

Cash at start of the year

1,469

1,862

3,597

4,500

Cash at end of the year

1,862

3,597

4,500

5,000

July 18, 2017

TCS | 1QFY2018 Result Update

Key ratios

Y/E March

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation ratio(x)

P/E (on FDEPS)

21.6

19.4

17.9

16.6

15.4

P/CEPS

22.5

18.0

16.5

15.4

14.2

P/BVPS

8.2

6.4

5.3

4.9

4.6

Dividend yield (%)

1.8

1.7

1.8

2.0

2.1

EV/Sales

4.6

4.0

3.6

3.3

3.0

EV/EBITDA

16.5

14.3

13.0

12.1

10.9

EV/Total assets

5.9

4.8

4.0

3.7

3.4

Per share data (`)

EPS

110.9

123.7

134.3

144.5

156.0

Cash EPS

106.8

133.6

145.1

156.0

168.6

Dividend

43.5

40.2

43.6

46.9

50.6

Book value

294

374

451

486

523

Dupont analysis

Tax retention ratio (PAT/PBT)

0.8

Cost of debt (PBT/EBIT)

1.1

EBIT margin (EBIT/Sales)

0.3

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

29.9

Return ratios (%)

RoCE (pre-tax)

33.9

31.6

28.8

28.9

29.2

Angel RoIC

54.0

46.7

50.7

47.1

50.6

RoE

34.2

33.1

29.8

29.7

29.8

Turnover ratios(x)

Asset turnover (fixed assets)

8.2

9.2

10.0

10.1

Receivables days

July 18, 2017

TCS | 1QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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offering of securities of the company covered by Analyst during the past twelve months.

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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)

July 18, 2017