Tata Consultancy Services Rating: Buy- A strong performance in the last quarter

TCS’ margins expanded 20bps q-o-q to 26.8% – its highest in 22 quarters despite a sharp 20% q-o-q rise in subcontracting costs and employee additions of 19,388 (highest ever) during Q4.

TCS’ Q4FY21 results were slightly ahead of estimates with revenues up 4.2% q-o-q, margins up 20bps q-o-q and recurring profits up 6% q-o-q. Growth was broad-based, led by BFSI. The key highlight of the result was TCS’ deal TCV of $9.2 bn, its highest, which indicates improved growth visibility. Mgmt comments on growth outlook were encouraging. We raise our FY22-23 estimates by 1-2% and maintain Buy with a revised PT of `3,740 based on 32x FY23e EPS.

Results beat estimates: Q4FY21 revenues of $6 bn, up 4.2% q-o-q in cc terms, and Ebit margin improvement of 20bps q-o-q to 26.8%, were marginally ahead of estimate. Profit of Rs 92.5 bn, up 6% q-o-q, was ahead of expectations due to higher-than-expected other income.

Broad-based revenue growth: Revenue growth during Q4 was broad-based with all verticals growing q-o-q. While revenue growth was led by BFSI (+7% q-o-q) due to scale-up of Pramerica and Postbank deals, retail (+4% q-o-q) and manufacturing (+3.9% q-o-q) continued to see recovery. Retail, Manufacturing and Communications verticals have witnessed 4-6% y-o-y cc decline in FY21 and continued recovery could drive further growth in FY22. Revenue growth was healthy across geographies with continental Europe (+8.5% q-o-q) driving growth in Q4.

Margins at a 5-year high: TCS’ margins expanded 20bps q-o-q to 26.8% – its highest in 22 quarters despite a sharp 20% q-o-q rise in subcontracting costs and employee additions of 19,388 (highest ever) during Q4. Mgmt mentioned that company is using subcontractors tactically and as new hires scale up, subcontracting costs will moderate.

Improved growth visibility: TCS announced order wins of $9.2 bn with TCV trends in BFSI, retail and North America being strong. Deal TCV was fairly well distributed with largest deal in Q4 at $0.5-0.6 bn. Mgmt highlighted that strong order book and deal pipeline augurs well for growth visibility. It expects to deliver double-digit growth in FY22.

Raise estimates and PT: We raise our earnings estimates by 1-2% to factor in improved growth visibility and better margin performance in Q4. Over FY21-23, we now expect TCS to deliver 10% CAGR in revenues and 15% CAGR in EPS. While TCS trades at c.50% premium to its 10-yr avg. PE, with the spread between bond yield and its earnings yield near average levels, there is scope for further re-rating. We maintain Buy.