Buy This Large Cap Tata Group Stock For 17% Potential Upside, Gave 154.98% In Past 5 Years

Stock Outlook

The current market price (CMP) of the stock is Rs 3131.70 apiece with the 52-week low of Rs 2,953 apiece, the 52-week high of Rs 4,043 apiece, respectively. It has a market capitalization of Rs 11,74,976 crore. 

Returns over the past 5 years

Over the week, the stock of the company has given a negative return of 2.69%. It gave 5.07% negative return in 1 month, 6.66% negative return in 3 months, and 15.7% negative return in 1 year, respectively.  In the past 3 years, it has given a positive return of 38.6%. Whereas, in the past 5 years, it has given a multibagger return of 154.98%. 

Demand environment remains resilient

TCS continues to see a strong demand environment, with clients maintaining spend in Cloud adoption, operating model transformation and vendor consolidation. All the demand drivers are in place with Cloud adoption witnessed strong traction. Demand environment continues to remain very strong. The company does not see any budget cancellation from client end. Overall, management is very vigilant and maximizing the contacts. As per the management, both in UK and North America, deal closure and demand continue to remain normal. But the cost of living has increased in UK, although these are all macro level concerns. In US, the expectation is that if recession comes, it will be shallow. However, in Europe, the expectation is that the impact of recession will be deeper. The company does not see any significant slowdown in Europe, as it witnessed a decent 12% growth. However, as per the clients' comment, there has been more concern about slowdown in Europe compared to the US clients. Management believes that North America to lead the growth in FY23.

Deal pipeline remain healthy

TCS continue to witness healthy deal pipeline in 1QFY23. Management also indicated a good visibility on the pipeline over the next few months. The company's order book is at all time high with TCV of US$8.2bn, including two USD 400 mn+ deals. BFSI has order book of US$2.6bn followed by Retail (US$1.2bn). North America posted a TCV of USD4.5bn. At current TCV and deal pipeline, the book to bill ratio is at 1.2x which management believe is good and they are not witnessing any alarming sign. The company continues to invest in its strength. On operating capacity, the company has built up the capacity and is confident of withstanding any type of volatility. Management stated that the spending on technology continues to rise. The company doesn't see any change in order pipeline and book-to-bill ratio of 1.2x looks good. Hence, healthy deal pipeline provides good revenue growth visibility in coming quarters.

Sustainability led innovation getting prominence

A new trend has been emerged in FY22, that was the growing volume of sustainability-led innovation, which has become a top priority items on most CEO agendas. This is in addition to the wave of business innovation in the form of 'Horizon Two' or 'Horizon Three' initiatives undertaken by the clients. Clients across industries such as retail, manufacturing, utilities and consumer goods are engaging TCS to reduce energy consumption, or to measure and track greenhouse gas emissions across their end-to-end supply chain, thereby reduce their carbon footprint, reduce waste and promote recycling. TCS has leveraged its expertise in IoT, advanced analytics, and machine learning to come up with a suite of offerings in this space, including intellectual properties such as Clever Energy, IP2, and TCS Envirozone. The sustainability led innovation which is getting prominence across the globe will augur well for TCS to amplify its growth trajectory.

1QFY23 has been mixed quarter

TCS reported mixed 1QFY23 numbers with revenue came in line with the consensus estimates, while EBIT margin and PAT came below the estimates. However, TCS has started FY23 on a stronger note with CC revenue growth of 16.2% YoY. Revenue on USD terms grew by 10.2% YoY to US$6,780mn, while its CC revenue in INR terms grew by 16.2% YoY and 15.5% YoY to Rs 52,758 crore. EBIT margin during the quarter declined by 186 bps QoQ and 242 bps YoY at 23.1%.

Weak EBIT growth impacted the overall net profitability and net profit declined by 4.5% QoQ at Rs 9,926 crore while on YoY basis it increased by 5.2%. Growth in revenue was led by Retail &CPG (up 25.1%), Communications & Media (up 19.6%), Manufacturing (up 16.4%) and Technology & Services (up 16.4%). BFSI grew by 13.9%, while Life Sciences &Healthcare witnessed 11.9% growth in 1QFY23.Among major markets, North America led the growth (up 19.1%), while Continental Europe and the UK grew by 12.1% and 12.6%, respectively. Amongst emerging markets, India, Asia Pacific, Latin America, Middle East & Africa grew by 20.8%, 6.2%, 21.6%and 3.2%, respectively in 1QFY23.

There was strong, broad-based demand across different services, led by Cloud, Consulting & Service Integration, Cognitive Business Operations and Enterprise Application Services. In 1QFY23, the company witnessed robust client addition in all business buckets. It added 9 new clients in US$100mn-band (taking the clients base to259), while it added 19 new clients in US$50mn-band. Management expects attrition which is the key risk to IT sector will start tapering in the next 3-4 months. Once the attrition will decline, the margins are likely to normalize and management expects the operating margins to be on increasing trajectory and expects to return to 4QFY22-level by the end of FY23.Hence, it is expected that as the attrition will decline, the operating margins and net profitability are likely to improve at the end of FY23.

Key Risks

Recession in US and Europe could result in reduction in technological spend by corporate and that could go against the IT companies. Persistent high attrition and increasing employee expenses could delay margins recovery.

Outlook

The fear of recession in advanced economies and ongoing geo-political tensions have impacted the macro environment and raised concerns over IT spends. As per Gartner, the IT service spending could be lower in 2022, 2023 vis-à-vis 2021n. Given the weak state of global economy, IT companies may have decided to go slow on employee benefit measures. However, as per TCS management, company does not see any budget cancellation by the clients and overall demand environment continues to remain very strong. During 1QFY23, company's order book is at all time high with TCV of US$8.2bn. Given TCS size, order book and exposure to long duration orders and portfolio, it is well positioned to withstand the weakening macro environment and ride on the anticipated industry growth. Further, TCS has consistently maintained its market leadership position and shown bestin-class execution. On the back of its superior execution capabilities, TCS maintain its industry-leading margin and demonstrate superior return ratios.

Buy for a target price of Rs 3,650 apiece

The stock has corrected nearly 19% from its all-time high made in January 2022 and thus the valuation looks compelling at current price. Hence, we advice investors to take the advantage of weak market and BUY the stock with target of Rs 3,650 from 12 months investment perspective as we believe that the long term growth story is still intact in TCS. At CMP, the scrip is valued at P/E multiple of 24.7x on FY24E Bloomberg consensus EPS of Rs 129.7.

Disclaimer

The stock has been picked from the brokerage report of Ashika Stock Broking. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.