TCS reported a miss in income development at 2.4% q-o-q in cc terms (vs 3.3% consensus expectations). A hit of 70-80bp was due to the billing loss in India on the back of the second COVID-19 wave. However, even soon after accommodating this hit (which we anticipate will reverse in the coming quarters), we think the earnings upgrade cycle is largely behind TCS. The “multi-year tech upgrade cycle” to which IT firms have alluded has raised the medium-term development outlook of the business from 6-7% to about 8-9%, but at this stage, it is not clear to us that double-digit development will be particular beyond FY22.
Expected double-digit development in FY22 is not, in our view, representative of medium-term development (helped also by base effects of FY21 – reduce revenues, but greater deal wins just the exit price from FY21 would lead to 8% development for TCS). On the positive side, TCS continues to impress on operating resilience and reported margins of 25.5%, in spite of the wage hike. We are concerned about sector margins as fees normalise, but TCS appears the greatest positioned amongst its business peers to handle price pressures. Deal wins of $8.1 bn had been fairly decent as properly.
Q1FY22 highlights: TCS’s 2.4% q-o-q cc income development was led by Life Science and Healthcare once more (up 7.3% q-o-q cc). Manufacturing (up 4.8%), retail CPG (up 4.4%) and BFSI (up 3.1%) grew as properly, though weakness in regional markets (down 5% q-o-q) dragged down development. Mgmt believes demand is sturdy, and is seeing indicators of revival in industries most impacted by the pandemic, such as travel and hospitality.
In terms of geography, North America (up 4.1% q-o-q) remained sturdy, whereas continental Europe slowed (up 1.5% q-o-q cc). The second COVID-19 wave in India (c5.5% of revenues) led to a 14.4% q-o-q decline in revenues. Ebit margin of 25.5% was down 130bp q-o-q, largely due to wage hikes (170bp effect), offset by favourable currency movements. Management is optimistic of development enhancing in Q2 and remains confident of managing margins even when travel and other fees move up.
Changes in estimates and valuation: We tweak our EPS estimates for FY22 (down 1.3%), to issue in Q1 revenues and to reflect a slight uptick in travel and other fees. We preserve our target a number of unchanged at 31x, which is at c45% premium to the industry, owing to its sturdy operating metrics and capability to handle price pressures. We retain Hold with a revised TP of Rs 3,455 (Rs 3,470 earlier).