TCS’ Q4FY21 final results had been slightly ahead of estimates with revenues up 4.2% q-o-q, margins up 20bps q-o-q and recurring income up 6% q-o-q. Growth was broad-based, led by BFSI. The crucial highlight of the outcome was TCS’ deal TCV of $9.2 bn, its highest, which indicates enhanced development visibility. Mgmt comments on development outlook had been encouraging. We raise our FY22-23 estimates by 1-2% and keep 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%, had been marginally ahead of estimate. Profit of Rs 92.5 bn, up 6% q-o-q, was ahead of expectations due to greater-than-anticipated other earnings.
Broad-based income development: Revenue development in the course of Q4 was broad-based with all verticals developing q-o-q. While income development was led by BFSI (+7% q-o-q) due to scale-up of Pramerica and Postbank bargains, 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 additional development in FY22. Revenue development was healthier across geographies with continental Europe (+8.5% q-o-q) driving development in Q4.
Margins at a 5-year higher: TCS’ margins expanded 20bps q-o-q to 26.8% – its highest in 22 quarters in spite of a sharp 20% q-o-q rise in subcontracting fees and employee additions of 19,388 (highest ever) in the course of Q4. Mgmt pointed out that firm is making use of subcontractors tactically and as new hires scale up, subcontracting fees will moderate.
Improved development visibility: TCS announced order wins of $9.2 bn with TCV trends in BFSI, retail and North America getting robust. Deal TCV was relatively effectively distributed with biggest deal in Q4 at $.5-.6 bn. Mgmt highlighted that robust order book and deal pipeline augurs effectively for development visibility. It expects to provide double-digit development in FY22.
Raise estimates and PT: We raise our earnings estimates by 1-2% to issue in enhanced development visibility and much better margin efficiency in Q4. Over FY21-23, we now count on TCS to provide 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 among bond yield and its earnings yield close to typical levels, there is scope for additional re-rating. We keep Buy.