4QFY2017 Result Update | IT

April 24, 2017

Tata Consultancy Services (TCS)

BUY

CMP

`2,311

Performance highlights

Target Price

`2,651

(` cr)

4QFY17 3QFY17

% chg (qoq) 4QFY16

% chg (yoy)

Investment Period

12 Months

Net revenue

29,642

29,735

(0.3)

28,449

4.2

Adj. EBITDA

7,065

8,233

(14.2)

7,738

(8.7)

Stock Info

Adj. EBITDA margin (%)

27.5

27.7

(20.3)

27.2

(22.5)

Sector

Adj. PAT

6,608

6,778

(2.5)

6,341

4.2

Market Cap (` cr)

455,405

Source: Company, Angel Research

Net Debt (` cr)

(45,288)

For 4QFY2017, TCS posted revenue of US$4,452mn v/s US$4,470mn expected, with

Beta

0.6

1.5% qoq growth mostly volume led, which was 1.7% qoq. Revenue in Constant Currency

52 Week High / Low

2,740/2,055

(CC) terms came in at 1.0% qoq. In Rupee terms, revenues de-grew by 0.3% qoq to

Avg. Daily Volume

96,418

`29,642cr v/s `29,996cr expected, led by Rupee appreciation. On the operating front,

Face Value (`)

EBIT came in at 25.7% v/s 26.0% expected, a 28bps qoq dip. PAT came in at `6,608cr v/s

BSE Sensex

29,365

`6,855cr expected, down 2.5% sequentially. We maintain our buy rating with target price

Nifty

9,119

of `2,651.

Reuters Code

TCS.BO

Bloomberg Code

TCS@IN

Quarterly highlights: TCS posted revenue of US$4,452mn V/s US$4,470mn expected,

with 1.5% qoq growth mostly volume led, which was 1.7% qoq. Revenue in Constant

Currency terms (CC) came in at 1.0% qoq. In terms of verticals, on CC basis the growth

Shareholding Pattern (%)

registered by the company in respective segments was, BFSI (-0.4% qoq), Retail & CPG

Promoters

73.3

(-3.0% qoq), Communication & Media (7.4% qoq), Manufacturing (1.7% qoq), Life

MF / Banks / Indian Fls

5.4

Sciences & Healthcare (3.1% qoq), Hi-Tech (5.2% qoq), Energy Utilities (1.4% qoq), Travel

FII / NRIs / OCBs

16.9

& Hospitality (3.6% qoq). In terms of geography, on CC basis, qoq (de-growth)/growth

Indian Public / Others

4.4

was North America (-1.8 qoq), Latin America (-7.3 qoq), UK (4.1% qoq), Continental Europe

(7.1 qoq), India (9.3% qoq), Asia Pacific (1.9% qoq), MEA (2.1% qoq). Overall attrition rate

came in at 11.5%. On the operating front, EBIT came in at 25.7% v/s 26.0% expected, a

Abs.(%)

3m 1yr

3yr

28bps qoq dip. PAT came in at `6,608cr v/s `6,855cr expected, down 2.5% qoq.

Sensex

8.6

13.7

29.0

TCS

1.0

(4.4)

4.1

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

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 BUY 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)

18.7

17.2

16.0

14.8

P/BV (x)

6.2

5.1

4.8

4.4

RoE (%)

33.1

29.8

29.7

29.8

RoCE (%)

31.6

28.8

28.9

29.2

Sarabjit kour Nangra

EV/Sales (x)

3.9

3.5

3.2

2.9

+91 22 3935 7800 Ext: 6806

EV/EBITDA (x)

13.8

12.6

11.7

10.5

sarabjit @angelbroking.com

Source: Company, Angel Research; Note: CMP as of April 22, 2017

Please refer to important disclosures at the end of this report

TCS | 4QFY2017 Result Update

Exhibit 1: 4QFY2017 performance (Consolidated, IFRS)

(` cr)

4QFY2017

3QFY2017

% chg (qoq) 4QFY2016

% chg (yoy)

FY2017

FY2016

% chg(yoy)

Net revenue

29,642

29,735

(0.3)

28,449

4.2

1,17,966

1,08,646

8.6

Cost of revenue

16,153

16,378

(1.4)

15,591

3.6

65,381

59,459

10.0

Gross profit

13,489

13,357

1.0

12,857

4.9

52,585

49,187

6.9

SG&A expense

5,342

5,124

4.3

4,975

7.4

20,755

18,956

9.5

EBITDA

8,147

8,233

(1.0)

7,883

3.4

31,830

30,231

5.3

Dep. and amortisation

520

500

4.0

471

10.4

1,506

1,441

4.5

EBIT

7,627

7,733

(1.4)

7,412

2.9

30,324

28,790

5.3

Other income

989

1,185

(16.5)

905

9.3

4,189

3,050

37.3

PBT

8,616

8,918

(3.4)

8,317

3.6

34,513

31,840

8.4

Income tax

1,994

2,104

(5.2)

1,970

1.2

8,156

7,503

8.7

PAT

6,622

6,814

(2.8)

6,347

4.3

26,357

24,337

8.3

Earnings in affiliates

Minority interest

123

Reported PAT

6,608

6,778

(2.5)

6,341

4.2

26,289

24,215

8.6

Adj. PAT

6,608

6,778

(2.5)

6,341

4.2

26,289

24,215

8.6

EPS

33.5

34.4

(2.6)

32.2

4.2

133.4

123.2

8.3

Gross margin (%)

45.5

44.9

59)bp

45.2

31bp

44.6

45.3

(70)bp

EBITDA margin (%)

27.5

27.7

(20)bp

27.7

(22)bp

27.0

27.8

(84)bp

EBIT margin (%)

25.7

26.0

(28)bp

26.1

(32bp

25.7

26.5

(79)bp

Source: Company, Angel Research

Exhibit 2: Actual v/s Angel estimates

(` cr)

Actual

Estimate

Var. (%)

Net revenue

29,642

29,996

(1.2)

EBIT margin (%)

25.7

26.0

(27)bps

Adj. PAT

6,608

6,855

(3.6)

Source: Company, Angel Research

Numbers lower than expectations

The company posted revenue of US$4,452mn V/s US$4,470mn expected, with 1.5% qoq

growth, mostly volume led, which was 1.7% qoq. Revenue in Constant Currency terms (CC)

came in at 1.0% qoq. In Rupee terms, revenues de-grew by 0.3% qoq to `29,642cr v/s

`29,996cr expected, led by Rupee appreciation.

In terms of verticals, on CC basis the (de-growth)/growth registered by the company in

respective segments was, BFSI (-0.4% qoq), Retail & CPG (-3.0% qoq), Communication &

Media (7.4% qoq), Manufacturing (1.7% qoq), Life Sciences & Healthcare (3.1% qoq),

Hi-Tech (5.2% qoq), Energy Utilities (1.4% qoq), Travel & Hospitality (3.6% qoq).

In terms of geography, on CC basis, qoq (de-growth)/growth was North America (-1.8 qoq),

Latin America (-7.3 qoq), UK (4.1% qoq), Continental Europe (7.1 qoq), India (9.3% qoq),

Asia Pacific (1.9% qoq), MEA (2.1% qoq).

April 24, 2017

TCS | 4QFY2017 Result Update

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

8.0

7.0

6.0

5.0

4.0

3.4

3.0

1.7

3.7

31.2

2.0

1.3

1.0

1.5

1.0

0.0

0.3

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

(1.0)

Volume growth

Revenue growth (USD terms)

Source: Company, Angel Research

Exhibit 4: Revenue drivers for 4QFY2017

1.7

1.5

0.5

(0.7)

(1)

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

39.8

(0.4)

4.8

Manufacturing

10.6

1.7

9.9

Telecom & Media

11.3

7.4

11.6

Life sciences and healthcare

7.6

3.1

11.5

Retail and distribution

12.9

(3.0)

(1.3)

Transportation & Hospitality

3.9

3.6

15.7

Energy and utilities

4.5

1.4

19.8

Hi-tech

5.6

5.2

8.0

Others

3.7

(2.1)

25.7

Source: Company, Angel Research

April 24, 2017

TCS | 4QFY2017 Result Update

Service line wise, Engg and Industrial services reported a sequential growth of

4.8% on CC basis. In the company’s anchor service line i.e. IT Solutions and

Services - ADM grew by 2.1% qoq on CC basis, Enterprise Solutions grew by 0.1%

qoq and Assurance Services grew by 1.3% qoq on a CC basis respectively. The

BPO segment grew by 4.2% qoq on a CC basis during the quarter. Asset

Leveraged Solutions (2.9% of sales) de-grew by 5.0% qoq on CC basis, while the

Infrastructure services posted a 2.8% qoq dip.

Exhibit 6: Revenue growth (Service wise on CC basis)

% to revenue

% chg (CC qoq)

% chg (yoy)

IT solutions and services

ADM

37.7

2.1

2.3

Enterprise solutions

17.3

0.1

8.9

Assurance services

9.0

1.3

10.0

Engg. and industrial services

5.0

4.8

17.2

Infrastructure services

16.2

(2.8)

14.7

Asset-leveraged solutions

2.9

(5.0)

(6.1)

BPO

11.6

4.2

11.7

Source: Company, Angel Research

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

1.8% qoq on CC basis), Latin America (-7.3% qoq on CC basis), UK (4.1% qoq on

CC basis), India (9.3% qoq on CC basis), and MEA (2.1% qoq on CC basis).

However, Continental Europe and Asia Pacific posted growth of 7.1% qoq and 1.9%

qoq on CC basis, respectively.

Exhibit 7: Revenue growth (Geography wise in INR terms)

% of revenue

% chg (CC qoq)

% chg (yoy)

U.S.

53.3

(1.8)

4.3

Latin America

2.1

(7.3)

4.8

U.K.

13.7

4.1

9.7

Continental Europe

11.8

7.1

15.1

India

6.8

9.3

20.9

Asia Pacific

9.7

1.9

4.7

MEA

2.6

2.1

11.4

Source: Company, Angel Research

Attrition rate declines

In 4QFY2017, TCS witnessed a gross addition of 20,093 employees and net

addition of 8,726 employees, taking its total employee base to 3,87,223. During

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

decreased to 11.5% from 12.2% in 3QFY2017.

April 24, 2017

TCS | 4QFY2017 Result Update

Exhibit 8: Hiring and attrition trend

Particulars

4QFY16 1QFY17

2QFY17

3QFY17

4QFY17

Gross addition

22,576

17,792

22,665

18,362

20,093

Net addition

9,152

8,236

9,440

6,978

8,726

Total employee base

3,53,843

3,62,079

3,71,519

3,78,497

3,87,223

Attrition (%) - LTM basis

14.7

13.6

12.9

12.2

11.5

Source: Company, Angel Research

Margin dips

On the operating front, the company reported EBITDA and EBIT margins at 27.5%

and 25.7%, i.e. a contraction of 20 bps and 28 bps qoq respectively. The EBIT

margins were impacted by changing business mix, stability in Diligenta, Japan, etc.

However, for FY2018, the company has guided the EBIT margins to be in the

range of 26-28%.

Exhibit 9: Adj. Margin profile

27.7

27.5

27.2

26.7

26.1

26.0

25.7

25.1

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

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$50mn+

revenue band increased by 3, in US$10mn+ revenue band increased by 6 and in

US$100mn+ revenue band increased by 1.

Exhibit 10: Client pyramid

4QFY16 1QFY17 2QFY17 3QFY17 4QFY17

US$1mn-5mn

400

408

410

426

438

US$5mn-10mn

131

141

154

149

US$10mn-20mn

125

119

110

114

120

US$20mn-50mn

100

102

107

106

US$50mn-100mn

US$100mn plus

Source: Company, Angel Research

April 24, 2017

TCS | 4QFY2017 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 set to be the chairman

of Tata Sons starting February 21, 2017, CFO Mr. Rajesh Gopinathan will take

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 optimist 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 14.8x FY2019E EPS of `156.0.We maintain our

Buy recommendation.

Exhibit 11: 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

April 24, 2017

TCS | 4QFY2017 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.

(2628)

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

April 24, 2017

TCS | 4QFY2017 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

April 24, 2017

TCS | 4QFY2017 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

April 24, 2017

TCS | 4QFY2017 Result Update

Key ratios

Y/E March

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation ratio(x)

P/E (on FDEPS)

20.8

18.7

17.2

16.0

14.8

P/CEPS

21.6

17.3

15.9

14.8

13.7

P/BVPS

7.9

6.2

5.1

4.8

4.4

Dividend yield (%)

1.9

1.7

1.9

2.0

2.2

EV/Sales

4.5

3.9

3.5

3.2

2.9

EV/EBITDA

16.0

13.8

12.6

11.7

10.5

EV/Total assets

5.7

4.7

3.9

3.6

3.3

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

April 24, 2017

TCS | 4QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

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and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a

registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public

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

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the

companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine

the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the

contrary view, if any.

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sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this

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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)

April 24, 2017