NEUTRAL

12-Jan-18

52wk Range H/L

Mkt Capital (Rs Cr)

Av. Volume (,000)

Financials/Valu

ation

FY15 FY16 FY17 FY18E FY19ENet Sales 94,648 1,08,646 1,17,966 1,21,920 1,31,043

EBITDA 24,482 30,590 32,311 32,050 34,071

EBIT 22,683 28,642 30,324 30,039 31,813

3QFY18 2QFY18 1QFY18 PAT 19,852 24,292 26,357 25,427 27,141

Promoters 73.6 73.6 73.6 EPS (Rs) 101 123 135 130 139

Public 26.4 26.4 26.4 EPS growth (%) 4% 22% 9% -4% 7%

Total 100.0 100.0 100.0 ROE (%) 40 40 34 27 25

ROCE (%) 45 47 38 32 29

BVPS 259 361 440 514 597

1Mn 3Mn 1Yr P/B (X) 10 6 5 5 5

Absolute 9.0 9.4 22.1 P/E (x) 25 18 18 21 20

Rel.to Nifty 5.1 3.9 -7.1

Recent Development : Key Highlights of Result Update

2788

Narnolia Securities LtdPlease refer to the Disclaimers at www.narnolia.com

NIHARIKA OJHANiharika@narnolia.com

Continuing investments by clients in Digital initiatives resulted in over

150+ wins and strong growth across all service practices

Strong client metrics was seen in Q3 with 3 clients added in $50M+ band,

7 in $20M+, 9 in $10M+ and 15 in the $5M+ band.

47

Stock is currently trading at 19.5 of FY19

Earnings.

We value the stock at Rs 2702 (19.5xFY19 EPS).

Upside -3%

2820/2154

533780

Implications of the US tax reform will have no imapct in FY18

Uncertainity in Performnce BFSI Performance and Retail &CPG bounce back

in 3QFY18: The company is still facing challenges due to uncertainity

because of BFSI verticals. Even the management is expecting to continue to

face problems for next few more quarters.Retail & CPG vertical saw

Turnaround which a growth of (3% YOY) and (6.4% QOQ in CC).

TCS secures USD 2.25-billion deal from Nielsen:Tata Consultancy Services

has bagged a USD 2.25-billion outsourcing contract from Nielsen, .The

partnership signed is a renewal of TCS existing collaboration with Nielsen.

The two companies had struck a 10-year deal in 2008 for USD 1.2 billion,

which was expanded to USD 2.5 billion in 2013.

TCS announces Iot digital transformation partnership with Rolls-Royce.

Target Price 2702

Previous Target Price 2458

CMP

EBIT margin in 3QFY18 remain flattish at 25.2% vs 25.1% in 2QFY18 .

TCS a leading global IT services, consulting and business solutions

organization, and Rolls Royce the market-leader in high performance

power systems, have announced the expansion of their long-standing

partnership in order to exploit future data innovation opportunities.

INDUSTRY - IT SOFTWARE

Revenue from Digital grew by 13.9% QoQ CC (39.6% YoY CC), and it

now constitutes to 22.1% of total revenue.

NIFTY - 10651

Key Highlights of the Report:

BLOOMBERG TCS IN

BSE Code - 532540

NSE Code - TCS

Company Data

Stock Performance %

Shareholding patterns %

80

85

90

95

100

105

110

115

120

125

130 TCS NIFTY

Financials 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 YoY % QoQ% FY16 FY17 YoY %

Net Sales / Income from

Operations

29,735 29,642 29,584 30,541 30,904 3.9% 1% 1,08,646 1,17,966 9%

Other Income 1,192 997 959 819 870 -27% 6% 3,054 4,221 38%

Employee Benefit

Expenses

15,275 15,692 16,183 16,572 16,458 8% -1% 41,769 61,621 48%

Other Expenses 6,231 5,818 5,988 5,805 6,159 -1% 6% 36,287 24,034 -34%

EBITDA 8,229 8,132 7,413 8,164 8,287 1% 2% 30,590 32,311 6%

Dep and Amortisation

expense

496 505 499 504 506 2% 0% 1,948 1,987 2%

EBIT 7,733 7,627 6,914 7,660 7,781 1% 2% 28,642 30,324 6%

Interest 7 8 27 7 6 -14% -14% 20 32 61%

PROFIT BEFORE TAX 8,918 8,616 7,846 8,472 8,645 31,676 34,513

Tax 2,104 1,994 1,896 2,012 2,100 0% 4% 7,301 8,156 12%

Exceptional Items - - - - - - -

PROFIT AFTER TAX 6,814 6,622 5,950 6,460 6,545 -4% 1% 24,292 26,357 9%

Strong client metrics was seen in Q3 with 3 clients added in $50M+ band, 7 in $20M+, 9 in $10M+

and 15 in the $5M+ band

PAT margin in the third quarter remain flattish to 21.2%.

Flattish margin in 3QFY18

EBIT margin in 3QFY18 remain flattish at 25.2% vs 25.1% in 3QFY18

Narnolia Securities Ltd Please refer to the Disclaimers at the end of this Report

Revenue grew at Rs 30,904 crore ( 1.2%QOQ) in 3QFY18 mainly due to turns around in the

Retail verticals .

Strength in Digital has been buoyant. Revenue from Digital grew by 13.9% QoQ CC (39.6% YoY

CC), and it now constitutes to 22.1% of total revenue.

Quarterly Performance

Income from Operation and Growth Trend

Revenue growth in 3QFY18 as per expectation

Volume growth was robust at 1.6 % QoQ. Strongest Volume growth for Dec Qtr in 3 years.

EBITDA and EBITDA Growth trend

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18

11,835 11,821 12,021 11,828 11,789 12,229 11,970

3,050 3,133 3,155 3,148 3,182 3,288 3,315

5,243 5,080 5,143 4,993 4,996 5,109 5,383

4,876 4,893 4,751 5,001 5,041 5,269 5,370

4,301 4,357 4,665 4,672 4,576 4,646 4,866

29,305 29,284 29,735 29,642 29,584 30,541 30,904

TCS won over 10 IoT deals including the one where Rolls Royce chose the TCS Connected Universe

Platform (TCUP) to underpin its next generation products and service.

Revenue from Digital grew by 13.9% QoQ CC (39.6% YoY CC), and it now constitutes to 22.1% of

total revenue.

Narnolia Securities Ltd Please refer to the Disclaimers at the end of this Report

Segmental Performance in 3QFY18

All other industry verticals grew above company average and four of them growing in double-digits

YOY except for BFSI . Energy & Utilities and Travel & Hospitality grew +20%.

Growth was led by Energy & Utilities (8.5% QOQ), Travel & Hospitality (2.9% QOQ) and Life

Sciences & Healthcare (2.5% QOQ).

BFSI continues to face challenges in next few quarters because absence of pick up in discretionary

spending by large banks

Turnaround of Retail & CPG vertical, BFSI still facing challenges

Retail & CPG vertical saw Turnaround which a growth of (3% YOY) and (6.4% QOQ in CC). Robust

demand pick up in Retail is expected in coming quarters.

On a year on year basis, with the exception of BFSI and Retail all industry verticals grew above

9.5%, with four verticals growing in double digits YOY

Major Deals win was seen in 3QFY18

Continuing investments by clients in Digital initiatives resulted in over 150+ wins and strong growth

across all service practices

Cognitive Business Operations also saw robust order book with 3 large deals in Market Research, Oil

& Gas and Telecom industries, as the value proposition of leveraging digital to transform business

operations and deliver superior business outcomes gains traction.

KEY SEGMENTS HIGHLIGHTS

PAT and PAT Growth Trend Employees Expenses

BFSI

Manufacturing

Retail and Consumer business

Segment Revenue (CR)

Communication, media and technology

Others

Total revenue from operation

19%19%20%20%21%21%22%22%23%23%24%

5400

5600

5800

6000

6200

6400

6600

6800

7000

PROFIT AFTER TAX margin%

14500

15000

15500

16000

16500

17000

employee expenses

Good traction in digital platforms

Geography Performance

From a geography perspective, growth was once again led by a strong 2.6% QoQ growth in

Continental Europe and 5% growth in Latin America. North America continue to grow below

company average primarily due to the softness in BFSI.

Attrition Rate further lower than 2QFY18

Attrition in IT services decreased to 11.1% (LTM) vs. 11,3% QoQ down 20 basis points. As per the

management, more freshers are expected to be on roll in Q3 and onwards.

Addition of 12,534 employees on a gross basis and 1667 employees on a net basis, closing the

quarter with a headcount of 390880 people.

The management is continuing with to hire local talent in all the major markets and reduce the

dependency on visas. In 3QFY18, the company hired 3000 employees outside India, bringing the

total to 9,979 in the nine months of the fiscal year.

On a YOY basis, Continental Europe grew 22.3%, UK grew 8.2% and India even performed very

well as compared to previous quarter with 4.1% YOY. North America grew 2.8% YoY.

Tata Consultancy Services (TCS) has bagged a USD 2.25-billion outsourcing contract from Nielsen,

a television rating measurement firm.The partnership, signed in October this year, is a renewal of

TCS' existing collaboration with Nielsen. The two companies had struck a 10-year deal in 2008 for

USD 1.2 billion, which was expanded to USD 2.5 billion in 2013.

Under the new deal, the terms of the agreement have been extended for an additional five years so

as to expire on December 31, 2025, with three one-year renewal options granted to Nielsen..

Nielsen has committed to purchase services from TCS from the Effective Date through the

remaining term of the Agreement in the amount of USD 2.25 billion, including a commitment to

purchase at least USD 320 million in services per year from 2017 through 2020, USD 186 million in

services per year from 2021 through 2024, and USD 139.5 million in services in 2025.

Narnolia Securities Ltd Please refer to the Disclaimers at the end of this Report

TCS secures USD 2.25-billion deal from Nielsen

RECENT DEVELOPMENT

TCS announces Internet of Things digital transformation partnership with Rolls-RoyceTCS a leading global IT services, consulting and business solutions organization, and Rolls Royce

the market-leader in high performance power systems, have announced the expansion of their long-

standing partnership in order to exploit future data innovation opportunities.

The partnership will help Rolls-Royce accelerate its ‘Digital First’ vision, deliver further value to

customers, improve existing services, accelerate development and deployment times and create

new areas of growth.

TCS highlighted that it is witnessing good traction in its digital platforms. In 1QFY18, it developed

two new offerings in its ‘TCS Bancs’ product which is continuing to perform good in 3QFY18 also. It

will help banks to develop customised applications on their own.

As regards its automation platform Ignio, TCS highlighted that it has also won new deals in

3QFY18. TCS won over 10 IoT deals including the one where Rolls Royce chose the TCS

Connected Universe Platform (TCUP) to underpin its next generation products and service.Cloud

Services saw robust growth led by public cloud, private cloud and application modernization

services, accounting for 22 Digital wins.

Please refer to the Disclaimers at the end of this Report

A strong performance was seen in the December quarter, marked by the signing of

industry-defining deals, robust client metrics and broad-based demand across industry

verticals.

Guideline for the year FY18

The company’s investments in building Digital prowess ,Operational efficiency , deal wins

by Diligenta and good performance shown by other verticals like Energy & Utilities and

Travel & Hospitality in 3QFY18 has made us likely to believe improvement in revenue

going forward.

We are NEUTRAL on the stock at Rs 2702 (19.5xFY19 EPS).

Narnolia Securities Ltd

Client addition: Strong client additions was seen across all revenue bands in 3QFY18.

During the quarter, 3 clients were added in $50M+ band, 7 in $20M+, 9 in $10M+ and 15 in

the $5M+ band. In total, strong addition was seen in each of the $50M+, $20M+, $10M+

and the $5M+ bands.

Deal wins: Continuing investments by clients in Digital initiatives resulted in over 150+ wins

and strong growth across all service practices.

View and Valuations

TCS’s revenue and operating margin execution significantly have led to good

performance in the past. But in the last few quarters , its major revenue contributors like

BFSI and RETAIL was facing challenges which has impacted its performance . BFSI which

contributed approx 35% of total revenue will continue facing challenges because absence

of pick up in discretionary spending by large banks . Even the management is expecting to

continue to face problems for next few more quaters. But its second major contributor Retail

has bounce backed as the management had stated in previous quater .

Verticals:Growth was led by Energy & Utilities (8.5% QOQ), Travel & Hospitality (2.9%

QOQ) and Life Sciences & Healthcare (2.5% QOQ).Retail & CPG vertical saw Turnaround

which a growth of (3% YOY) and (6.4% QOQ in CC). Robust demand pick up in Retail is

expected in coming quarters.Retail & CPG vertical saw Turnaround which a growth of (3%

YOY) and (6.4% QOQ in CC). Robust demand pick up in Retail is expected in coming

quarters.Georgraphy wise:From a geography perspective, growth was once again led by a strong

2.6% QoQ growth in Continental Europe and 5% growth in Latin America. North America

continue to grow below company average primarily due to the softness in BFSI.

The management announced a dividend per share of Rs 7 in 2QFY18.

By Geography (%) 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18

North America 53 54 54 54 54 55 53 53 52 52

Latin America 2 2 2 2 2 2 2 2 2 2

UK 16 16 15 15 14 13 14 14 14 14

Continental Europe 11 11 11 12 12 11 12 13 13 14

India 7 6 6 6 6 6 7 7 6 6

Asia Pacific 9 9 10 10 10 10 10 10 10 10

MEA 2 2 2 2 2 3 3 3 2 2

Clients Contribution 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18

US$ 1m+ Clients 819 838 829 847 859 880 897 905 933 941

US$ 5m+ Clients 404 413 429 439 449 454 459 464 470 485

US$ 10m+ Clients 274 281 298 298 295 300 310 322 328 337

US$ 20m+ Clients 171 173 173 179 185 186 190 190 196 203

US$ 50m+ Clients 65 65 73 77 78 80 84 85 91 94

US$ 100m+ Clients 33 34 37 37 36 34 35 36 37 37

IP Revenue (%) 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18

BFSI 41 41 41 40 40 40 40 33 33 32

Retail & CPG 14 14 14 14 13 14 13 12 12 13

Communication & Media 10 10 11 11 11 11 11 7 7 7

Manufacturing 8 8 10 10 11 11 11 8 8 8

Hi-Tech 6 6 6 5 5 5 6 0 0 0

Travel & Hospitality 4 4 4 4 4 4 4 4 4 4

Media & Entertainment 2 3 0 0 0 0 0 0 0 0

Others 5 4 3 3 3 4 4 18 17 17

Life Sciences &

Healthcare

7 7 7 7 8 7 8 7 7 7

Energy & Utilities 4 4 4 4 4 5 5 4 4 5

Technology & Services 0 0 0 0 0 0 0 8 8 8

Total Employee Base 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18

Total Employees 335620 344691 353843 362079 371519 378497 387223 385809 389213 390880

Gross Additions 25186 22118 22576 17792 22665 18362 20093 11202 15868 12534

Net Additions 10685 9071 9071 8236 9440 6978 8726 -1414 3404 1667

Narnolia Securities Ltd Please refer to the Disclaimers at the end of this Report

Operating Metrics

Income Statement Rs in Crores Key Ratios

Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E

Revenue from Operation 1,08,646 1,17,966 1,21,920 1,31,043 ROE 40 34 27 25

Change (%) 15% 9% 3% 7% ROCE 47 38 32 29

Other operating Income - - - - Asset Turnover 1 1 1 1

EBITDA 30,590 32,311 32,050 34,071 Current Ratio 4 6 7 7

Change (%) 25% 6% -1% 6% Debt/Equity 1 1 1 1

Margin (%) 28% 27% 26% 26% Inv Days 0 0 0 0

Depr & Amor. 1,948 1,987 2,011 2,258 DPS 44 47 47 47

EBIT 28,642 30,324 30,039 31,813 Payable Days 25 19 19 19

Int. & other fin. Cost 20 32 46 24 Debtor Days 81 70 70 70

Other Income 3,054 4,221 3,518 3,689 Earnings Per Share 123 135 130 139

EBT 31,676 34,513 33,511 35,478 Book Value Per Share 361 440 514 597

Exp Item - - - - P/E 18 18 21 20

Tax 7,301 8,156 8,084 8,337 Price / Book Value 6 5 5 5

Minority Int & P/L share of Ass. 83 - - - EV/EBITDA 14 14 17 16

Reported PAT 24,292 26,357 25,427 27,141 EV/Sales 4 4 4 4

Change (%) 22% 9% -4% 7% Div Payout% 64% 32% 36% 34%

Margin(%) 22% 22% 21% 21%

Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores

Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E

Share Capital 197 197 197 197 PBT 31,676 26,357 33,511 35,478

Reserves 70,875 86,017 1,00,497 1,16,690 (inc)/Dec in Working Capital (4,824) (631) (683) (1,715)

Networth 71,072 86,214 1,00,694 1,16,887 Non Cash Op Exp (168) 7,443 2,011 2,258

Debt 196 271 278 293 Int Paid (+)

Minority interest 355 366 366 366 Tax Paid (7,569) (7,946) (8,084) (8,337)

Other Non Cur Liab 2017 2,089.0 2,089.0 2,089.0 others - - - -

Total Capital Employed 71,268 86,485 1,00,971 1,17,180 CF from Op. Activities 19,115 25,223 26,754 27,684

Net Fixed Assets (incl CWIP) 11,775 11,645 12,087 13,452 (inc)/Dec in FA & CWIP (1,990) (2,453) (3,623) (3,623)

Non Cur Investments 343 344 344 344 Free Cashflow 17,125 22,770 23,131 24,061

Non Curr Assets 13,765 10,737 10,760 10,813 (Pur)/Sale of Inv - (1,21,423) (7,556) (10,132)

Unbilled revenue 3,992 5,351 5,351 5,351 others (3,162) 1,06,681 - -

Inventory 16 21 22 23 CF from Inv. Activities (5,209) (16,732) (10,009) (13,755)

Debtors 24,073 22,684 23,382 25,132 inc/(dec) in NW - - - -

Cash & Bank 6,295 3,597 9,403 12,400 inc/(dec) in Debt (73) 87 7 15

Current investments 22,479 41,636 49,192 59,324 Int. Paid (20) (20) - -

Short-term loans and advances 2,743 2,909 3,006 3,231 Div Paid (inc tax) (9,479) (10,947) (10,947) (10,947)

Other Curr Assets 3,615 4,328 4,404 4,580 others (44) (146) - -

Curr Assets 63,213 80,526 94,760 1,10,041 CF from Fin. Activities (9,616) (11,026) (10,940) (10,932)

Creditors 7,541 6,279 6,489 6,975 Inc(Dec) in Cash 4,291 (2,535) 5,806 2,997

Provisons 115 66 68 73 Add: Opening Balance 2,001 6,132 3,597 9,403

Other Curr Liab 7,800 7,967 7,967 7,967 Closing Balance 6,292 3,597 9,403 12,400

Curr Liabilities 15,456 14,312 14,525 15,015

Net Curr Assets 47,757 66,214 80,235 95,026

Total Assets 89,096 1,03,252 1,17,951 1,34,651

Financials Snap Shot

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

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