11 OCT 2018 Quarterly Update

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TATA CONSULTANCY SERVICES

Research at your
finger tips HOLD
IT - SERVICES Target Price: Rs 2,150

Lacks acceleration trigger; downgrade to HOLD

TCS’ Q2FY19 revenue growth at 3.2% QoQ (Cons/AxisCap: 3%) was
CMP : Rs 1,980
a narrow disappointment in CC terms (3.7%, AxisCap/cons: 4.2%).
Potential Upside : 9%
EBIT margin expanded ~150 bps QoQ to 26.5% (AxisCap/cons:
26.1%/26.3%) aided by INR (120 bps) and operating efficiencies
(30 bps). MARKET DATA
No. of Shares : 3,829 mn
H1 strong but company lacks growth acceleration trigger; downgrade Free Float : 28%
to HOLD: Strong H1FY19 performance has set the tone for double digit Market Cap : Rs 7,580 bn
growth in FY19 with segments of BFSI witnessing turnaround and Retail 52-week High / Low : Rs 2,273 / Rs 1,229

sustaining momentum. While management reiterated its target of Avg. Daily vol. (6mth) : 3.8 mn shares
Bloomberg Code : TCS IB Equity
operating at double digit growth, muted deal wins (QoQ) coupled with
Promoters Holding : 72%
already ramped-up large projects would lead to USD revenue CAGR of
FII / DII : 17% / 7%
~10% over FY18-20. We believe current premium valuations factor in
sustained improvement in revenue trajectory (low-teen revenue growth).

Key reasons for our downgrade

♦ No further room for revenue acceleration: TCS had managed to win multi-million dollar deals in H2FY18 and ramp
up of these deal wins has led to strong H1FY19 performance. We expect revenue momentum to sustain at current
trajectory with no major acceleration owing to weak seasonality in H2.
♦ Europe hard to predict: Europe recorded a strong growth in Q2 (~5% QoQ); however, with a possibility of hard
Brexit, sustained momentum in Europe/UK remain questionable blurring the revenue outlook for the geographies.
We expect clients to hold back on discretionary spend (especially on new initiatives like digital).
♦ Lack of acceleration in deal wins: TCS recorded USD 4.9 bn in TCV in Q2, in line with that signed in Q1, flat
QoQ, indicating no material acceleration in deal wins. While commentary remains strong across key verticals
including sustained momentum in BFSI and Retail, challenges in Manufacturing and volatility in Communication
remains a drag.
♦ Looming fear around trade wars: TCS highlighted that clients are monitoring global events; any escalations in trade
wars could dent the demand environment with clients holding back on their IT spends.

Financial summary (Consolidated) Key drivers

March FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E
Sales (Rs bn) 1,231 1,466 1,669 1,828 Revenue (USD bn) 19 21 23 25
Adj PAT (Rs bn) 258 320 373 412 % change YoY 9% 10% 10% 9%
Con. EPS* (Rs.) - 82.4 92.3 102.8 24.8 26.2 26.8 27.3
EBITDA margin
EPS (Rs.) 67.1 83.7 97.5 107.6 % % % %
Change YOY (%) 0.6 24.8 16.4 10.4
P/E (x) 29.5 23.6 20.3 18.4 Price performance
RoE (%) 29.4 33.1 31.9 29.5 220
Sensex TCS
RoCE (%) 37.5 42.2 40.9 37.9 180
EV/EBITDA (x) 23.6 18.2 15.3 13.3 140
DPS (Rs) 30.0 33.7 43.3 43.3
100
Source: *Consensus broker estimates, Company, Axis Capital
60
Oct-17 Jan-18 Apr-18 Jul-18 Oct-18

Shashi Bhusan Executive Director – IT & Telecom Vishal Desai AVP – IT Services
shashi.bhusan@axiscap.in 91 22 4325 1104 vishal.desai@axiscap.in 91 22 4325 1119

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 11 OCT 2018 Quarterly Update
TATA CONSULTANCY SERVICES
IT - SERVICES

Exhibit 1: Results update

Quarter ended 12 months ended
(Rs mn) Sep-18 Sep-17 % Chg Jun-18 % Chg Mar-19E Mar-18 % Chg
Net Sales 368,540 305,410 21 342,610 8 1,465,502 1,231,040 19
EBITDA 102,780 81,640 26 90,710 13 405,692 325,160 25
Other income 5,930 8,120 - 12,080 - 38,110 35,900 -
PBIDT 108,710 89,760 21 102,790 6 443,802 361,060 23
Depreciation 5,070 5,040 - 4,930 - 21,138 20,140 -
Interest 0 0 - 0 - -
PBT 103,640 84,720 22 97,860 6 422,664 340,920 24
Tax 24,370 20,120 - 24,240 - 101,669 82,120 -
Minority Interest 260 140 - 220 - 630 540 -
Adjusted PAT 79,010 64,460 23 73,400 8 320,366 258,260 24
Extra ordinary income/ (exp.) 0 0 - 0 - -
Reported PAT 79,010 64,460 23 73,400 8 320,366 258,260 24
No. of shares (mn) 3,824 3,829 - 3,828 - 3,825 3,849 -
EBITDA margins (%) 27.9 26.7 116 bps 26.5 141 bps 27.7 26.4 127 bps
PBIDT margins (%) 29.5 29.4 11 bps 30.0 (50)bps 30.3 29.3 95 bps
Rep. EPS - Annualized (Rs) 82.6 67.3 23 76.7 8 83.7 67.1 25
Source: Company, Axis Capital

Recovery in North America, BFSI and Retail playing out with improving outlook:
BFSI (+6% YoY cc) continues to witness improved traction with growth being driven
by cloud migration, micro services, cyber security, intelligent automation. TCS has
been early in investing in new technologies which has positioned it well to capture
growth. Moreover, strong deal wins in BFSI (TCV: USD 1.5 bn) improves the
revenue visibility for the vertical. Management highlighted banks in North America
view TCS as strategic player in their transformational journey due to its early
investments. North America (+8% YoY) has seen strong momentum and is expected
to continue with growth being broad-based.

Order book steady; pipeline continues to be healthy: TCS reported a healthy order
book of USD 4.9 bn in TCV (both new and renewal deals) (Q1: USD 4.9 bn). BFSI
recorded USD 1.5 bn in TCV and Retail recorded USD 700 mn. From a geography
perspective, North America recorded USD 2.4 bn in TCV wins.
We believe strong deal wins in key segments of BFSI and Retail improve revenue
visibility. Management highlighted the deal pipeline remains healthy.

Digital (28% of revenue) – driving momentum: Digital continues to record strong

performance (~60% YoY/17% QoQ in cc terms). According to management, new
technologies like Anlaytics, AI, Automation, Blockchain, location agnostic Agile is
driving increased penetration with existing clients.

Other highlights: (i) Client addition continues to be strong with 4 clients added in
USD 100 mn; (ii) 278k+ employees trained on Digital and 279k+ employees
trained in Agile; (iii), TCS Bancs recorded 6 new wins; (iv) Ignio recorded 7 wins.

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 11 OCT 2018 Quarterly Update
TATA CONSULTANCY SERVICES
IT - SERVICES

Cut our FY19/20 estimates; introduce FY21

We revise our USD revenue estimate for FY19/20 down by 2%/4% due to impact
of cross currency. However, our revised USD/INR assumption drives our margin
expectations up by 60/50 bps. Hence, our EPS estimates stand revised by
+3%/+4%. We have assumed INR/USD rate of Rs 70.7/72.7 for FY19/20.

Exhibit 2: Change in estimates

Year to 31-Mar FY19E FY20E
Revenue (US$ m)
- New 20,936 22,961
- Old 21,338 23,990
Change (%) (1.9) (4.3)
Recurring EPS - (Rs)
- New 83.7 97.5
- Old 81.2 93.7
Change (%) 3.1 4.0
Source: Axis Capital

Estimates and valuations: Momentum priced in, cut to HOLD

TCS reported improving revenue growth trajectory across verticals with turnaround
in BFSI and Retail over the last four quarters. We expect revenue momentum to
sustain at low-teens. However, we revise our target multiple to 21x (from 22x)
owing to lack of revenue acceleration trigger in H2, and possibility of growth
impediments due to possibility of hard Brexit and trade-wars. We expect ~10%
revenue CAGR in USD terms over FY18-20 with EPS of Rs 84/ Rs 98 in
FY19/FY20E. Downgrade to HOLD.

Our revised TP stands at Rs 2,150 (21x Sep’20 EPS) vs. earlier TP of Rs 2,060,
implying 9% upside from CMP of Rs 1,980. At CMP, stock trades at 24x/20x
FY19E/ FY20E EPS.

Exhibit 3: Digital gaining prominence

Digital Rev % of rev (RHS)

1,600 29%
(USD mn) 28%
1,400 27%
24% 25%
22% 25%
1,200
23%
1,000
21%
800 20% 19%
600 18% 19%
17% 17%
16%
400 15%
Q2FY17

Q4FY17

Q2FY18

Q4FY18

Q2FY19
Q3FY17

Q1FY18

Q3FY18

Q1FY19

Source: Company, Axis Capital

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 11 OCT 2018 Quarterly Update
TATA CONSULTANCY SERVICES
IT - SERVICES

Exhibit 4: Result summary

2Q19 1Q19 QoQ 2Q18 YoY AxisCap Cons AxisCap vs Act
Consolidated Sales (US$ mn) 5,215 5,051 3.2% 4,739 10.0% 5,203 5,203 0.2%
Consolidated Sales 368,540 342,610 7.6% 305,410 20.7% 364,748 364,704 1.0%
Opertaing Profit 97,710 85,780 13.9% 76,600 27.6% 95,262 95,779 2.6%
OPM 26.5% 25.0% 148 bps 25.1% 143 bps 26.1% 26.3% 40 bps
PBT 103,640 97,860 5.9% 84,720 22.3% 103,162 101,865 0.5%
PAT 79,010 73,400 7.6% 64,460 22.6% 78,308 79,254 0.9%
PAT Margin 21.4% 21.4% 1 bps 21.1% 33 bps 21.5% 21.7% -3 bps
EPS 20.66 19.17 7.8% 16.84 22.7% 20.46 20.70 1.0%
Source: Bloomberg, Company, Axis Capital

Exhibit 5: Geography mix

(USD mn) 2Q19 1Q19 QoQ 2Q18 YoY QoQ (CC) YoY (CC)
America 2,769 2,672 3.6% 2,564 8.0%
North America 2,665 2,576 3.4% 2,460 8.3% 2.6% 8.1%
Latin America 104 96 8.7% 104 0.0% 7.1% 6.8%
Europe 1,544 1,490 3.6% 1,298 18.9%
UK 814 783 3.9% 663 22.6% 6.0% 22.8%
Continental Europe 730 707 3.2% 635 15.0% 4.1% 17.4%
India 292 293 -0.3% 299 -2.2% 5.0% 7.4%
Asia Pacific 501 485 3.2% 464 7.8% 4.5% 12.5%
MEA 110 111 -1.4% 114 -3.7% 0.3% -4.4%

% of Total
America 53.1% 52.9% 20 bps 54.1% -100 bps
North America 51.1% 51.0% 10 bps 51.9% -80 bps
Ibero America 2.0% 1.9% 10 bps 2.2% -20 bps
Europe 29.6% 29.5% 10 bps 27.4% 220 bps
UK 15.6% 15.5% 10 bps 14.0% 160 bps
Continental Europe 14.0% 14.0% 0 bps 13.4% 60 bps
India 5.6% 5.8% -20 bps 6.3% -70 bps
Asia Pacific 9.6% 9.6% 0 bps 9.8% -20 bps
MEA 2.1% 2.2% -10 bps 2.4% -30 bps
Source: Company, Axis Capital

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 11 OCT 2018 Quarterly Update
TATA CONSULTANCY SERVICES
IT - SERVICES

Exhibit 6: Vertical mix

(USD mn) 2Q19 1Q19 QoQ 2Q18 YoY QoQ (CC) YoY (CC)
BFSI 1,627 1,571 3.6% 1,545 5.3% 3.5% 6.1%
Retail & CPG 866 838 3.2% 754 14.9% 3.4% 15.6%
Comm & media 360 359 0.3% 336 6.9% 0.0% 8.0%
Mfg 375 369 1.8% 351 7.1% 1.6% 6.9%
Life Sc & Healthcare 391 369 6.1% 341 14.6% 5.7% 14.7%
E&U 240 242 -1.1% 199 20.5% 0.0% 22.2%
Tech Services 396 389 1.9% 379 4.5% 2.3% 5.8%
Regional Markets & Others 960 914 5.0% 834 15.0% 7.3% 19.8%
Total 5,215 5,051 3.2% 4,739 10.0% 3.7% 11.5%
Digital Revenue 1,465 1,263 16.0% 934 57.0% 16.5% 59.8%
% of Total
BFSI 31.2% 31.1% 10 bps 32.6% -140 bps
Retail & CPG 16.6% 16.6% 0 bps 15.9% 70 bps
Comm & media 6.9% 7.1% -20 bps 7.1% -20 bps
Mfg 7.2% 7.3% -10 bps 7.4% -20 bps
Life Sc & Healthcare 7.5% 7.3% 20 bps 7.2% 30 bps
E&U 4.6% 4.8% -20 bps 4.2% 40 bps
Travel & Hospitality 0.0% 0.0% 0 bps 0.0% 0 bps
Tech Services 7.6% 7.7% -10 bps 8.0% -40 bps
Regional Markets & Others 18.4% 18.1% 30 bps 17.6% 80 bps
Digital Revenue 28.1% 25.0% 310 bps 19.7% 840 bps
Source: Company, Axis Capital

Exhibit 7: Client mining

2Q19 1Q19 QoQ 2Q18 YoY
US$ 1mn clients 989 978 1.1% 933 6.0%
US$ 5mn clients 513 508 1.0% 470 9.1%
US$ 10mn clients 365 355 2.8% 328 11.3%
US$ 20mn clients 213 206 3.4% 196 8.7%
US$ 50mn clients 98 97 1.0% 91 7.7%
US$ 100mn clients 44 40 10.0% 37 18.9%
Source: Company, Axis Capital

Exhibit 8: Employee metrics

2Q19 1Q19 QoQ 2Q18 YoY
Headcount 411,102 400,875 2.6% 389,213 5.6%
Net Addition (Consolidated) 10,227 5,877 74.0% 3,404 200.4%
Attrition rate (IT Services) 0.0% 11.7% -1170 bps 11.3% -1130 bps
Attrition rate (IT Services + BPS) 10.9% 10.9% 0 bps 12.1% -120 bps
Source: Company, Axis Capital

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 11 OCT 2018 Quarterly Update
TATA CONSULTANCY SERVICES
IT - SERVICES
Financial summary (Consolidated)
Profit & loss (Rs bn) Cash flow (Rs bn)
March FY18 FY19E FY20E FY21E March FY18 FY19E FY20E FY21E
Net sales 1,231 1,466 1,669 1,828 Profit before tax 341 423 491 541
Other operating income 0 0 0 0 Depreciation & Amortisation 0 0 0 0
Total operating income 1,231 1,466 1,669 1,828 Chg in working capital (4) (30) (33) (26)
Cost of goods sold (713) (843) (950) (1,031) CF from operations 275 312 364 412
Gross profit 518 622 720 797 Capital expenditure (20) (41) (42) (41)
Gross margin (%) 42 42 43 44 CF from investing (38) (41) (42) (41)
Total operating expenses (213) (238) (272) (299) Equity raised/ (repaid) (153) 0 0 0
EBITDA 305 385 448 498 Debt raised/ (repaid) (0) 0 0 0
EBITDA margin (%) 25 26 27 27 Dividend paid (116) (129) (166) (166)
Depreciation 0 0 0 0 CF from financing (267) (130) (166) (166)
EBIT 305 385 448 498 Net chg in cash (30) 142 155 206
Net interest 0 0 0 0
Other income 36 38 43 43
Key ratios
Profit before tax 341 423 491 541
March FY18 FY19E FY20E FY21E
Total taxation (82) (102) (118) (129)
OPERATIONAL
Tax rate (%) 24 24 24 24
FDEPS (Rs) 67.1 83.7 97.5 107.6
Profit after tax 259 321 373 412
CEPS (Rs) 67.1 83.7 97.5 107.6
Minorities (1) (1) (0) (0)
DPS (Rs) 30.0 33.7 43.3 43.3
Profit/ Loss associate co(s) 0 0 0 0
Dividend payout ratio (%) 44.8 40.2 44.5 40.3
Adjusted net profit 258 320 373 412
GROWTH
Adj. PAT margin (%) 21 22 22 23
Net sales (%) 4.4 19.0 13.9 9.5
Net non-recurring items 0 0 0 0
EBITDA (%) 0.6 26.1 16.5 11.2
Reported net profit 258 320 373 412
Adj net profit (%) (1.8) 24.0 16.4 10.4
FDEPS (%) 0.6 24.8 16.4 10.4
Balance sheet (Rs bn) PERFORMANCE
March FY18 FY19E FY20E FY21E RoE (%) 29.4 33.1 31.9 29.5
Paid-up capital 2 4 4 4 RoCE (%) 37.5 42.2 40.9 37.9
Reserves & surplus 870 1,060 1,267 1,513 EFFICIENCY
Net worth 876 1,068 1,275 1,521 Asset turnover (x) 2.8 3.1 3.2 3.2
Sales/ total assets (x) 1.2 1.2 1.2 1.1
Borrowing 2 1 1 1
Working capital/ sales (x) 0.2 0.2 0.2 0.2
Other non-current liabilities 29 29 29 29 Receivable days 74 73 73 73
Total liabilities 908 1,097 1,304 1,550 Inventory days 0 0 0 0
Gross fixed assets 155 175 194 208 Payable days 0 0 0 0
Less: Depreciation 0 0 0 0 FINANCIAL STABILITY
Total debt/ equity (x) 0.0 0.0 0.0 0.0
Net fixed assets 155 175 194 208
Net debt/ equity (x) (0.5) (0.6) (0.6) (0.7)
Add: Capital WIP 0 0 0 0
Current ratio (x) 4.6 5.2 5.6 6.2
Total fixed assets 155 175 194 208 Interest cover (x) - - - -
Total Investment 3 3 3 3 VALUATION
Inventory 0 0 0 0 PE (x) 29.5 23.6 20.3 18.4
EV/ EBITDA (x) 23.6 18.2 15.3 13.3
Debtors 249 293 334 366
EV/ Net sales (x) 5.8 4.8 4.1 3.6
Cash & bank 426 568 723 929
PB (x) 8.7 7.1 6.0 5.0
Loans & advances 0 0 0 0 Dividend yield (%) 1.5 1.7 2.2 2.2
Total current assets 812 996 1,211 1,463 Free cash flow yield (%) 3.3 3.6 4.2 4.9
Current liabilities 176 191 217 238 Source: Company, Axis Capital; Financials as per IFRS

Net current assets 636 806 994 1,225

Other non-current assets 114 114 114 114
Total assets 908 1,097 1,304 1,550
Source: Company, Axis Capital; Financials as per IFRS

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 11 OCT 2018 Quarterly Update
TATA CONSULTANCY SERVICES
IT - SERVICES

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 11 OCT 2018 Quarterly Update
TATA CONSULTANCY SERVICES
IT - SERVICES

Axis Capital Limited

Axis House, C2, Wadia International Centre, P.B Marg, Worli, Mumbai 400 025, India.
Tel:- Board +91-22 4325 2525; Dealing +91-22 2438 8861-69;
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DEFINITION OF RATINGS
Ratings Expected absolute returns over 12 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than -10%

ANALYST DISCLOSURES
1. The analyst(s) declares that neither he/ his relatives have a Beneficial or Actual ownership of > 1% of equity of subject company/ companies
2. The analyst(s) declares that he has no material conflict of interest with the subject company/ companies of this report

Tata Consultancy Services (TCS.BO, TCS IN) Price and Recommendation History

CMP Buy Hold Sell Under Review Not Rated

2,500 (Rs)

2,000

1,500

1,000

500

0
Oct-15

Feb-16
Nov-15

Oct-16

Feb-17

Oct-17

Feb-18

Oct-18
Nov-17
Nov-16
Dec-15

Dec-16

Dec-17
May-16

May-17

May-18

Aug-18
Aug-16

Aug-17

Jul-18
Jul-16

Jul-17
Apr-16

Apr-17

Apr-18
Jan-16

Jan-17

Jan-18

Mar-18
Mar-16

Mar-17

Jun-17

Jun-18
Jun-16

Sep-17

Sep-18
Sep-16

Date Targe t P rice Re co Date Targe t P rice Re co Date Targe t P rice Re co Date Targe t P rice Re co

1 3 -O ct-1 5 1 ,2 5 4 H old 5 -O ct-1 6 1 ,1 7 9 H old 1 1 - Ja n - 1 8 1 ,5 3 8 Buy 1 1 - Ju l - 1 8 2 ,0 6 0 Buy

6 - Ja n - 1 6 1 ,2 5 0 H old 1 3 -O ct-1 6 1 ,1 3 8 H old 2 8 -Fe b -1 8 1 ,5 3 8 Buy

1 2 - Ja n - 1 6 1 ,2 3 8 H old 5 - Ja n - 1 7 1 ,1 6 0 H old 1 3 -M ar-1 8 1 ,5 3 8 Buy

2 2 - Ja n - 1 6 1 ,2 3 8 H old 1 2 - Ja n - 1 7 1 ,1 2 7 H old 2 8 -M ar-1 8 1 ,5 3 8 Buy

2 3 -Fe b -1 6 1 ,2 3 8 H old 1 8 - Ja n - 1 7 1 ,1 2 7 H old 3 -A p r-1 8 1 ,5 3 8 Buy

1 7 -M ar-1 6 1 ,2 3 8 H old 2 1 -Fe b -1 7 1 ,2 9 7 H old 1 9 -A p r-1 8 1 ,8 0 5 Buy

5 -A p r-1 6 1 ,2 9 2 H old 1 8 -A p r-1 7 1 ,2 3 7 H old 8 - Ju n - 1 8 1 ,8 0 5 Buy

1 8 -A p r-1 6 1 ,2 7 3 H old 5 - Ju l - 1 7 1 ,2 1 8 H old 1 1 - Ju n - 1 8 1 ,9 9 0 Buy

5 - Ju l - 1 6 1 ,2 5 7 H old 1 3 - Ju l - 1 7 1 ,2 1 3 H old 1 5 - Ju n - 1 8 1 ,9 9 0 Buy

1 4 - Ju l - 1 6 1 ,2 5 4 H old 5 -O ct-1 7 1 ,2 1 2 H old 2 - Ju l - 1 8 1 ,9 9 0 Buy

1 -Se p -1 6 1 ,1 8 1 H old 1 2 -O ct-1 7 1 ,2 1 2 H old 1 0 - Ju l - 1 8 2 ,0 6 0 Buy

Source: Axis Capital

Axis Capital is available on Bloomberg (AXCP<Go>), Reuters.com, Firstcall.com and Factset.com 08