CLSA has maintained its buy rating on Tata Consultancy Services (TCS) but lowered earnings estimates for FY18-20 due to likely rupee strength and wage hikes.
TCS reiterated its 26-28 percent EBIT (earnings before interest and tax) margin targets on a constant currency basis.
However, acknowledging a sharper Q1 headwind from forex, wage hikes and visa makes it harder, the research house said and cut margin estimate by 50bps to 25.5 percent from forex weakness. It also lowered FY18 marging estimate by 100bps (8.1 percent).
It took FY18 USD-INR assumption to spot, keeping FY19/20 at 68 against the US dollar. This drives 8/1/1 percent cuts to FY18-20 earnings, it said.
Meanwhile, the brokerage house believes TCS should be the prime beneficiary of a BFS (banking, financial, services) spend recovery and digital implementation shift and outpace peers in FY18 organic growth and capital returns.
"A meeting with TCS CFO V Ramakrishnan suggests that pick up in US BFS spending hasn't materialised yet, as large clients hold off larger deals but TCS continues to expect stronger deal momentum later into the year, particularly in insurance which could drive stronger second half of FY18 growth," CLSA said.
The research house feels visibility is higher in insurance, where large deals can drive second half of FY18 strength in FY18.
Momentum remained strong in manufacturing, life sciences, energy and telecoms, but retail remained a weak vertical due to ongoing store closure which can perhaps bottom out in FY18, it said, adding other large verticals continued to grow considerably stronger.
Lapping FY17 growth is contingent on second half of FY18, CLSA feels.
The research house said the recent reorganisation has emphasised growth in new service lines with high potential such as automation, analytics, IoT, cloud and cyber security.
With each service headed by senior leaders and horizontal organisation reporting directly to the CEO, TCS appears to be doubling down on scaling digital, it feels.
At 10:20 hours IST, the stock price was quoting at Rs 2,426.30, down Rs 15.20, or 0.62 percent on the BSE.
Posted by Sunil Shankar Matkar
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