TCS reported an in-line income development of 4% q-o-q CC in Q2FY22. However, USD income development (2.9% q-o-q) missed our estimate of 3.7% q-o-q development. Ebit margin expanded by 10bp q-o-q to 25.6%, but was decrease than our estimate of 26.2%, on provide side challenges. PAT stood at Rs 97 bn, up 6.9% q-o-q, aided by greater other revenue and steady ETR. The organization reported an OCF/PAT of 103% and a FCF/PAT of 97% on excellent working capital management, indicating the potential to create powerful money flow. H1FY22 USD Revenue/ Ebit/ PAT grew 19.1%/20.6%/28.4% y-o-y.
Deal wins steady: Deal wins in Q2FY22 stood at $7.6 bn (-6% q-o-q), implying a book-to-bill ratio of 1.2x. TCS saw one more quarter of a healthful mix of offers across sizes. Overall TCV was up 25% y-o-y right after excluding one mega deal from the Q2FY21 base. Steadiness in deal wins, in spite of the absence of mega offers, is encouraging for the organization.
Demand atmosphere powerful: The commentary on the general demand atmosphere continues to stay upbeat. It sees improved technologies intensity from enterprise buyers and expects demand momentum to continue in the medium term. Cloud adoption is at initial stages as only 20-30% workloads have moved to the Cloud.
Supply-side challenges: LTM attrition for TCS rose 330bp q-o-q to 11.9%, indicating a clear provide-side crunch in the sector. At the similar time, it had a powerful net addition of 19,700 workers q-o-q. The management stated provide-side challenges will continue to stay higher for the next 2-3 quarters prior to normalising. We count on present provide-side challenges to normalise in medium term.
Margin to stay soft in the close to term: H2FY22 is seasonally powerful for margins, provided the absorption of wage hikes and operating leverage. However, management has indicated that margin in the close to term can be soft, led by ongoing provide-side challenges.
Estimates and valuation: We stay positive on the organization, provided its powerful development outlook. But higher valuations leave restricted area for disappointment. A miss on estimates in Q2FY22, coupled with a soft margin outlook, can outcome in close to term stress on the stock. We have lowered our EPS estimates by 2%/4% for FY22E/FY23E. We count on 14.3%/18.4% USD income/EPS CAGR more than FY21-23E. Our TP of Rs 3,770 per share, implies 31x FY23E EPS. We preserve our Neutral rating.