TCS Rating buy; Quarter results saw a beat on all counts

TCS Q2FY21 revenues up 4.8% q-o-q in cc terms, Ebit margins of 26.2%, up 260bps q-o-q and profit of Rs 74.7 bn, up 7% q-o-q beat estimates. Deal TCV at $8.6 bn, up 25% q-o-q, was also very strong. Recovery was broad-based across verticals and geographies. Management commentary is positive on demand outlook and vendor consolidation. The company has declared a dividend of Rs 12/share and approved buyback of Rs 160 bn at a price of Rs 3,000/sh, a 9% premium to CMP.

Strong beat: TCS’ Q2FY21 revenues of $5.4 bn, up 4.8% q-o-q in CC terms, Ebit margin improvement of 260bps q-o-q to 26% and profit of Rs 74.7 bn, up 7% q-o-q, were all ahead of expectations. The beat on margins was mainly driven by higher than expected revenue growth. Profit beat was driven by both Ebit beat as well as higher other income.

Broad-based revenue growth and strong TCV: Growth was driven by BFSI vertical, up 6% q-o-q, Retail & CPG, up 9% q-o-q and life sciences, up 7% q-o-q. Revenue growth was healthy across geographies with Continental Europe, up 6.1% q-o-q, being the fastest growing large market. Deal booking was also very strong at $8.6 bn, possibly due to the Phoenix deal.

Encouraging initial commentary: Management has indicated that the industry is witnessing the first phase of multi-year technology transformation cycle. While cloud adoption will serve as the first phase, as enterprises utilise the capabilities enabled by cloud, subsequent technology transformation cycles will kick in. The company plans to roll out salary hikes effective 1st October and has increased recruitment globally.

Buyback & dividends: The board has approved a buyback of Rs 160 bn. The size is in line with the buybacks announced in 2017 and 2018. The company has also announced Rs 12/share interim dividend.