 "TCS, Tata Consultancy Services")
Tata Consultancy Services (TCS) could outperform peers, delivering best-in-class revenue and margins in the next financial year (FY25), said analysts at UBS, who believe the Street is not pricing-in any potential re-rating in the stock.
"We see enough drivers to believe TCS can deliver industry-leading growth and margins among peers in FY25. These include: ramp-up of large deals such as BSNL, NEST, Aviva etc; revival in the BFSI segment; revival in cloud migration projects; and continued managed services demand strength at industry level," analysts at UBS said.
The brokerage has increased their FY25/26 earnings per share (EPS) estimates 3 per cent/9 per cent, upgrading it to 'Buy' from 'Neutral', and valuing the company at 28x PE (earlier 26x) on FY26E EPS.
"TCS' current multiple premium over peers is below the historical average, and any outperformance makes the case for a re-rating," it added.
At the bourses, TCS shares advanced 3.1 per cent to Rs 4,124.6 per share on the BSE in Tuesday's intraday trade. It ended 2.5 per cent higher at Rs 4,103 apiece as against the benchmark S&P BSE Sensex's 0.4 per cent gains, and the S&P BSE Information Technology index's 0.76 per cent rise.
So far in CY24, TCS has surged 8 per cent as against 1.2 per cent gain in the benchmark and 7 per cent rise in the S&P BSE IT index.
Here're the two key reasons why UBS is bullish on TCS:
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Positive surprise on revenue likely
According to the global brokerage, TCS may lead its peers in revenue growth by 100-150bp in FY25. The brokerage pegs TCS' dollar revenue growth at 8.8 per cent Y-o-Y in FY25 vs 4.7 per cent in FY24), surpassing its peers' 3.6-8.2 per cent expected growth (UBS estimate).
"We believe the market is not completely taking into account the impact of the ramp-up in large deals. Furthermore, we think the potential demand recovery in FY25E will positively surprise the market which it is not currently priced in," UBS said.
The brokerage projects the BSNL deal to contribute revenue of $1.5-2 billion over the deal's lifetime, of which $1 billion could come in the next 12-18 months. This, the brokerage said, should add 2.5 per cent to TCS' revenue growth in FY25.
"Besides BSNL deal, NEST, JLR, and Aviva expansions should contribute 0.8 per cent to revenue in FY25. This is in addition to the 5.5 per cent core revenue growth we expect for the company in FY25," UBS added.
That apart, revival of BFSI deals (where TCS, HCL Tech, and Accenture are key beneficiaries of the vendor consolidation), and likely acceleration in cloud migration projects should aid deal revenue.
More levers for margin improvement
The sharp surge in attrition post-Covid led to pyramid distortion, costly backfilling, and fall in utilisation resulting in a 300bp compression in gross margins of TCS since March 2020.
The IT services sector, UBS said, has not witnessed such sharp swings in attrition before and there is likely a lag between the reversal of attrition to be followed with improvements in operating metrics.
"We believe TCS has the ability to optimally utilise its bench in the coming quarters, and can improve its utilisation by another 200bp. We expect TCS to expand Ebit margins by 150bp by FY26," it said.
The brokerage expects margins to be partly aided by rupee depreciation. It further expects margins to diverge in the range of -90bp to 50bp, from their estimated FY26 margin of 26.3 per cent, with a +/- 3 per cent change in USD/INR rates.
"The average consensus price target of Rs 3,997, as per Bloomberg, is lower than the current market price even though 52 per cent of consensus ratings are buys, suggesting the market is skeptical about growth/margin levers. We believe any positive surprise in the company's performance should lead to positive upgrades," UBS said.
The brokerage's revised target price of Rs 4,700 (from Rs 4,050) suggests 14.5 per cent upside from current levels.
