With growth, margins will also improve – TCS

Update on the Indian Equity Market:

On Monday, NIFTY closed at 10,815 (+0.4%). Top gainers in NIFTY50 were Tech M (+5.5%), Hindalco (+3.8%), and HCLT (+3.7%). The top losers were Power grid (-2.2%), Bajaj Finance (-2.1%), and HDFC Bank (-1.9%). Top sectoral gainers were IT (+1.7%), METAL (+1.5%), and FMCG (+1.3%) and sectoral losers were REALTY (-1.6%), PSU BANK (-1.6%), and FIN SERVICES (-1.3%).

Excerpts of an interview with V Ramakrishnan, CFO, TCS and Milind Lakkad, CHRO, TCS with ET now dated 10^th July 2020:

• 95% of our people are working from home and only 1% come to work for various reasons. It has been a change for everybody. It hasn’t been an easy cakewalk but they have done very different things.
• Associate health and well being has been a paramount thing for them and has been a key factor in decision making.
• They do everything while continuing to take care of associates’ health and ensure that they continue to be a happy organisation.
• The aspiration of 26-28% margin is very much intact. Of course this pandemic has changed certain dynamics. So, the timing of when they will get back, is dependent on the recovery. They are confident of recovery in the coming quarters.
• Recovery will be very segment and specific country driven, but they expect that to happen across many of the sectors.
• Along with growth, obviously the margins will also be improving because in the current quarter, the reduction in the margins is directly related to the contraction in the demand and in the revenue.
• While they were able to get back almost 300 bps outside of anything to do with employee cost but still they had a dip of about5% that is directly related to the drop in revenue so with improvement in the recovery, they will also see the improvement in margins.
• The investment is driven by what is required to make sure that they are abreast of what is happening on the technology front to make sure that TCS people are equipped and in terms of what they can showcase to their So the investments have been going on and the balance sheet is strong.
• They will continue to invest in research and innovation, in building capabilities at scale among the employees and also in labs and customer experience areas.
• Going forward, they will continue to get all 40,000 offers they made in the campuses in India and that will go through from this mid-July though the year. The engagement with the fresher recruits and everything else is on very actively for the last three months and they will honour all of those offers.
• They have to be conscious that some of the sectors have been badly affected and there is an expectation from some of the customers and some of the sectors for support. They have been very supportive and we have looked at it in the contextually and depending on the relationship, it is a very mutually beneficial relationship.
• Their dividend or return policy has been 80% to 100% of free cash flow. So, there is no departure from that policy. In the last couple of years, they have been very close to 100% or even slightly higher. They will stay within that range.
• Customers’ ability and willingness to adapt to the Work from home model and to be able to connect people from wherever they are. So, the location independence of this model will change the dynamics for everybody.
• They always thought that the most important meetings have to happen in person and that is not the case anymore. They just come together, discuss and have a chat and then the two CEOs connect in a jiffy. Those are big things that will help establish a deeper relationship with customers going forward.

Consensus Estimate: (Source: market screener and investing.com websites)

• The closing price of TCS was ₹ 2,222/- as of 13-July-2020.  It traded at 27x/ 23x the consensus earnings estimate of ₹ 82.6/ 95.6 for FY21E/22E respectively.
• The consensus price target of TCS is ₹ 2,088/- which trades at 22x the earnings estimate for FY22E of ₹6/-

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