BFSI and retail will drive growth in the medium and long term: TCS

Update on the Indian Equity Market:

The markets continued the downward trajectory on Tuesday with the Nifty falling 55 points to close at 12,170. Monday’s fall was on the back of a combination of selling pressure from the DII and muted participation by FIIs. Within the index, some of the stock movements were a reaction to the quarterly results declared by the company. Within the sectoral indices, only Media (2.2%) closed the day in green while REALTY (-1.5%), AUTO (-1.4%) and METAL (-1.4%) led the laggards. Within the index stocks, INFRATEL (8.6%), ZEEL (4.5%) and BPCL (1.4%) were the top gainers whereas TATASTEEL (-3.3%), M&M (-2.9%) and TATAMOTORS (-2.4%) were the top stocks that ended in the negative.

Excerpts from an interview with Mr Rajesh Gopinathan, CEO – TCS. The interview aired on CNBC-TV18 on 20^th January 2020.

• TCS declared 3QFY20 results with a YoY increase of 0.2% in consolidated net profit at ₹ 81,180 mn. In this interview, he discussed the third quarter performance and the outlook in detail.
• He is hopeful of sustaining margins at around 25 percent going forward on back of their strong delivery model. The company has been investing continuously in the organic talent building capability and over time, the investment into the group of 5-12 year old people has been significant. This has been going for on for last five- six years. He believes that the pool is now very strong and there is an opportunity to expand the base.
• The company is aspiring to achieve margins of 26%. To achieve the target, the combination of operational elements and the currency needs to be supportive. Both the things came together in the 3QFY20. The currency will remain volatile. However, he believes that the way things are moving, probably that will also be supportive of the medium-term.
• He said that the medium to long term growth trends will be based on BFSI and retail because the rest of the verticals are firing all cylinders. They are all well into the double digit space. In BFSI & retail, the company is observing very diverse performance across geographies and sub-segments. The weakness can be isolated down to the large banks and the large retailers in US and UK. The company is not losing wallet share in these geographies but it is the sub-segment that forms large part of the base business.
• In terms of addition to headcount, he said that it is 23,500 this year, same as last year. The hiring was front-loaded during the current year.
• In the retail space, more traditional retailers seem to be finding their groove. In the US, the players like Best Buy and Walmart are doing significantly better and standing up to the pure online players very well. He believes that the company will revert back to double digit growth in the retail segment.

Consensus Estimate (Source: market screener website)

• The closing price of TCS ₹ 2,170/- as of 21-January-2020. It traded at 25x / 23x / 21x the consensus EPS for FY20E / 21E / 22E of ₹ 88.0/ 96.1/ 104.0 respectively.
• Consensus target price of TCS ₹ 2,108/- implies a PE multiple of 20x on FY22E EPS of ₹ 104.0.