Tata Consultancy Services

Ltd.

RESULT UPDATE 12th January, 2018

 India Equity Institutional Research II Result Update - Q3FY18 II 12th January, 2018 Page 2

TCS Ltd. Moderate Growth, But Margins Improved

CMP Target Potential Upside Market Cap (INR Mn) Recommendation Sector
INR 2,770 INR 2806 1.3% 5,337,799 Hold IT
Result highlights
• In dollar terms, Net Sales in Q3 FY18 stood at $4,787 Mn which was below our estimates of $4,816 Mn and reported a growth of 1.0% qoq and 9.1% yoy
• By Geography: Continental Europe led the growth figures with a 1.8% qoq growth, followed by UK at 1.7% qoq and Americas at 1.2% qoq. India has
seen a bounce back of 1% after a significant decline of 7% in the 2QFY18 .
• By Industry: Retail & Distribution led the pack with a growth of 6.1% qoq growth, followed by Energies and Utilities at 8.2% qoq growth and Life
Sciences and Healthcare at 2.4% qoq growth.
• Digital revenues stood at 22.1% of overall revenues, registering a 13.9% qoq growth.

KEY FINANCIALS
MARKET DATA
Particulars (INR Mn) FY16 FY17 FY18E FY19E FY20E
Shares outs (Mn) 1914 Net Sales 1,086,462 1,179,660 1,224,095 1,320,077 1,426,709
EquityCap (INR Mn) 1914 EBITDA 306,780 323,110 328,029 367,441 395,757
Mkt Cap (INR Mn) 5337799 PAT 241,386 264,340 257,819 289,327 310,462
52 Wk H/L (INR) 2820/2154 EPS 122.8 134.2 134.7 151.2 162.2
Volume Avg (3m K) 1186.5
EBITDA Margin 28.2% 27.4% 26.8% 27.8% 27.7%
NPM 22.2% 22.4% 21.1% 21.9% 21.8%
Face Value (INR) 1
Source: Company, KRChoksey Research
Bloomberg Code TCS IN
BFSI remained Sluggish while Retail saw a Robust Growth
TCS reported relatively good set of numbers for 3Q FY18 on the back of strong addition of clients in $50+
SHARE PRICE PERFORMANCE Mn band, robust increase in volume by 1.6% qoq, and significant turnaround for the Retail segment, which
grew by 6.4% qoq. However, BFSI still remained sluggish that de-grew by 1.5% qoq.
130
In 3Q FY18, Retail saw a turnaround and it has shown an early stage of recovery. As per the
management, the company is expected to grow at a double-digit in Fy19 owing to increase in deal wins
from retailers. The retail firms continue to integrate emerging technologies into their business processes
for enhancing the overall value proposition to the consumers.
105
The weakness is still persisted in the BFSI vertical especially in the North American region. The BFSI in the
US is looking for a next wave of transformation and is experimenting with a new set of emerging
technologies. As per the management, the large banks in the US region have infused their IT spending for
in-house implementation, which has reduced the overall growth in the US’s BFSI vertical. However, the
80 BFSI vertical in the other region such as Canada, Australia, and Europe has witnessed a significant growth
in adoption of Cloud and Automation. But, it is unlikely to overweigh the drag that is persisted in the
Jan-16
Jan-15

Jan-18
Jul-16
Jul-15

Jan-17

Jul-17

US, and it will continue to be in pressure for the next couple of quarters.
Margins to improve further, led by Automation, and Agile Workspace
TCS Sensex In Q3 FY18, The company’s operating margin has improved by 10 bps despite the seasonally weakness in
the quarter. The company reported that the margins to improve further due to re-skilling the existing
workforce and bringing in automation, which would translate into a better utilization and reduce cost per
MARKET INFO employee. We believe, the company’s initiative to bring automation, re-skilling employees, and investing
in agile workspace would improve its margin going forward.
SENSEX 34503 Key Concall Highlights: (i) Digital Revenues stood at 22.1% of revenues in Q3 and reported a robust
NIFTY 10651 growth of 13.9% qoq (ii) Ignio now has close to 50 customers with strong wins in Q3 FY18 (iii) TCS
Holmes, which is into Telecom and Operational space, has also witnessed a strong momentum and has
added 3 clients in Q3 bringing the total customer to 27 (iv) The company is yet to decide the provision for
taxation for the newly proposed Tax Bill. As per the management, the benefit would be visible in
FY19, however it remained shy to disclose the exact benefit that would be reaping from the bill, but the
company would definitely be benefited from the inter-company transactions.

SHARE HOLDING PATTERN (%)

Particulars Dec 17 Sep 17 Jun 17

Promoters

FIIs
73.57
16.26
73.57
16.58
73.57
16.73 8.0% 9.7%
DIIs 6.07 5.63 5.45
Others 4.1 4.23 4.25 Revenue CAGR between FY PAT CAGR between FY 18E
18E and FY 20E and FY 20E
Total 100 100 100

ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576

Vaibhav Chowdhry, vaibhav.chowdhry@krchoksey.com, +91-22-6696 5571 is also available on Bloomberg KRCS<GO> www.krchoksey.com
Pritesh Thakkar, pritesh.thakkar@krchoksey.com, +91-22-6696 5429 Thomson Reuters, Factset and Capital IQ
India Equity Institutional Research II Result Update - Q3FY18 II 12th January, 2018 Page 3

TCS Ltd.
Valuation and View
The company has witnessed a rapid transition from traditional services to a consumer-centric dynamic services for digitally
transforming the enterprises. We believe the turnaround for retail segment on the back of large number of deal wins would be a
huge positive for the company and the revenues generation from other buckets such as Healthcare and Manufacturing would
provide a support to its top-line growth. We believe that the slippages in the BFSI segment would continue to be there for the next
couple of quarters until the large banking clients start adopting Wave-2 technologies for transforming their business process
digitally.
We have a “Hold” rating on the stock and as we assign multiple of 17.3x to its FY20E EPS of INR. 162.2 to arrive at a price target of
INR 2,806.
Exhibit 1: Quarterly Income Statement
Q3 Q2 Q-o-Q Q3 Y-o-Y
INR Mn Q3 FY18 Est. Deviation %
FY18 FY18 change % FY17 change %
Net Sales (US$ Mn) 4,787 4,591 4.3% 4,374 9.4% 4,817 -0.6%
Net Sales 309,040 295,840 4.5% 292,840 5.5% 310,667 -0.5%
Less:
Employees Remuneration &
171,950 169,140 1.7% 161,710 6.3% 176,310 -2.5%
Benefits
Administrative & Other Expenses 51,550 52,580 (2.0%) 50,020 3.1% 51,571 0.0%
Total Operating Expenditure 223,500 221,720 0.8% 211,730 5.6% 227,881 -1.9%
Operating Profit 85,540 74,120 15.4% 81,110 5.5% 82,786 3.3%
Less: Depreciation 7,730 4,980 55.2% 4,940 56.5% 5,150 50.1%
Add: Other income 77,810 69,140 12.5% 76,170 2.2% 77,636 0.2%
Profit Before Tax 2,190 3,810 (42.5%) 5,100 (57.1%) 3,790
Adjusted Profits 86,450 72,680 18.9% 86,690 (0.3%) 86,196 0.3%
Less: Total Tax 21,000 18,960 10.8% 20,660 1.6% 20,256 3.7%
PAT 65,450 53,720 21.8% 66,030 (0.9%) 65,940 -0.7%
Adjusted PAT 140 50 N.A. 170 N.A. 143
Reported Diluted EPS (Rs.) 65,310 53,670 21.7% 65,860 (0.8%) 65,797 -0.7%
Adjusted Diluted EPS (Rs.) 34.1 27.4 24.3% 34.4 (0.8%) 33.6 1.4%
No of Shared Diluted (mn) 1,914 1,956 1,914 1,956
Change Change
Margin Analysis %
In bps In bps
EBITDA margin 27.7% 25.1% 263 27.7% -2 26.6% 103
Operating Margin 25.2% 23.4% 181 26.0% -83 25.0% 19
NPM 28.0% 24.6% 341 29.6% -163 27.7% 23
Adjusted NPM 21.1% 18.1% 299 22.5% -136 21.2% -5
Effective Tax Rate % 24.3% 26.1% -180 23.8% 46 23.5% 79
Change Change
Cost Analysis %
In bps In bps
Employee Cost/Net Sales 55.6% 57.2% -153 55.2% 42 56.8% -111
SG&A/Net sales 10.1% 5.2% 482 12.2% -213 10.0% 5
Source: Company, KRChoksey Research

ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576

Vaibhav Chowdhry, vaibhav.chowdhry@krchoksey.com, +91-22-6696 5571 is also available on Bloomberg KRCS<GO> www.krchoksey.com
Pritesh Thakkar, pritesh.thakkar@krchoksey.com, +91-22-6696 5429 Thomson Reuters, Factset and Capital IQ
India Equity Institutional Research II Result Update - Q3FY18 II 12th January, 2018 Page 4

TCS Ltd.
Exhibit 2: Profit & Loss Statement

YE March (INR Mn) FY16 FY17 FY18E FY19E FY20E

Net Sales 1,086,462 1,179,660 1,224,095 1,320,077 1,426,709

Sales Growth% 14.8% 8.6% 3.8% 7.8% 8.1%

Total Revenue 1,086,462 1,179,660 1,224,095 1,320,077 1,426,709

Less:

Employees Cost 595,490 654,300 688,001 738,807 804,129

SG&A 184,193 202,250 208,065 213,829 226,824

Total Operating Expenditure 779,682 856,550 896,066 952,636 1,030,953

EBITDA 306,780 323,110 328,029 367,441 395,757

EBITDA Growth% 24.4% 5.3% 1.5% 12.0% 7.7%

Less: Depreciation 18,879 19,870 22,676 23,891 27,422

Operating Profit 287,901 303,240 305,353 343,550 368,334

Operating Profit Growh% 26.3% 5.3% 0.7% 12.5% 7.2%

Interest Paid 331 560 469 277 277

Non-operating Income 30,833 46,000 35,594 38,367 41,460

Profit Before Tax 318,403 348,680 340,478 381,641 409,518

Tax 74,825 81,940 80,012 89,686 96,237

Minority Interest 2,192 2,401 2,646 2,628 2,820

Net Profit 241,386 264,340 257,819 289,327 310,462

Adjusted Profit 241,386 264,340 257,819 289,327 310,462

Reported Diluted EPS Rs 122.8 134.2 134.7 151.2 162.2

Diluted EPS Growth% 22.4% 9.3% 0.4% 12.2% 7.3%

Source: Company, KRChoksey Research

ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576

Vaibhav Chowdhry, vaibhav.chowdhry@krchoksey.com, +91-22-6696 5571 is also available on Bloomberg KRCS<GO> www.krchoksey.com
Pritesh Thakkar, pritesh.thakkar@krchoksey.com, +91-22-6696 5429 Thomson Reuters, Factset and Capital IQ
India Equity Institutional Research II Result Update - Q3FY18 II 12th January, 2018 Page 5

TCS Ltd.
Exhibit 3: Balance Sheet

YE March(INR Mn) FY16 FY17 FY18E FY19E FY20E

Liabilities
Equity Capital 1,970 1,970 1,970 1,970 1,970
Reserves & Surplus 708,750 860,170 1,013,213 1,184,960 1,369,253
Equity 710,720 862,140 1,015,183 1,186,930 1,371,223
Net Worth 710,720 862,140 1,015,183 1,186,930 1,371,223
Minority Interest 3,550 3,660 6,306 8,934 11,754
Net Deferred tax liability/(Asset) 8,050 9,190 9,190 9,190 9,190
Total Loans 1,960 2,710 3,010 3,010 3,010
Other Non Current Liabilities 11,720 11,310 15,913 17,161 18,547
Capital Employed 736,000 889,010 1,049,603 1,225,226 1,413,724
Assets
Gross Block 193,080 208,910 223,910 238,910 253,910
Less: Depreciation 93,370 108,340 131,016 154,907 182,329
Net Block 99,710 100,570 92,894 84,003 71,581
Capital WIP 16,700 15,410 27,620 27,620 27,620
Investments 228,220 419,800 419,800 419,800 419,800
Intangible Assets 18,030 16,440 16,440 16,440 16,440
Others-A 120,960 91,400 110,169 118,807 128,404
Current Assets
Inventories 160 210 3,682 3,915 4,237
Sundry Debtors 280,650 280,350 328,661 354,432 383,062
Cash and Bank Balance 66,450 40,020 146,986 303,879 474,609
Loans and Advances 27,430 29,090 5,264 5,676 6,135
Other Current Assets 32,650 39,230 67,325 72,604 78,469
Total Current Assets 407,340 388,900 551,919 740,506 946,512
Less: Current Liabilities & Provisions
Sundry Creditors 75,410 62,790 81,014 86,129 93,209
Provisions 1,550 1,050 16,002 17,937 19,247
Other Current Liabilities 78,000 79,670 72,222 77,885 84,176
Total Current Liabilities & Provisions 154,960 143,510 169,238 181,950 196,633
Capital Applied 736,000 889,010 1,049,603 1,225,226 1,413,724
Source: Company, KRChoksey Research

ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576

Vaibhav Chowdhry, vaibhav.chowdhry@krchoksey.com, +91-22-6696 5571 is also available on Bloomberg KRCS<GO> www.krchoksey.com
Pritesh Thakkar, pritesh.thakkar@krchoksey.com, +91-22-6696 5429 Thomson Reuters, Factset and Capital IQ
India Equity Institutional Research II Result Update - Q3FY18 II 12th January, 2018 Page 6

TCS Ltd.
Exhibit 4: Ratio Analysis

YE March FY16 FY17 FY18E FY19E FY20E

Key Operating Ratios
EBITDA Margin(%) 28.2% 27.4% 26.8% 27.8% 27.7%
Tax/PBT(%) 23.5% 23.5% 23.5% 23.5% 23.5%
Net Profit Margin(%) 22.2% 22.4% 21.1% 21.9% 21.8%
RoE(%) 34.8% 31.5% 26.0% 24.9% 23.1%
RoCE(%) 33.7% 30.6% 25.3% 24.2% 22.5%
Current Ratio(x) 2.6x 2.7x 3.3x 4.1x 4.8x
Dividend Payout(%) 47.5% 40.6% 40.6% 40.6% 40.6%
Book Value Per Share(Rs.) 361.5 437.5 530.4 620.1 716.4
Financial Leverage Ratios
Interest/Debt(%) 13.3% 19.6% 15.6% 18.4% 18.4%
Growth Indicators%
Growth in Gross Block(%) 17.7% 8.2% 7.2% 6.7% 6.3%
Sales Growth(%) 14.8% 8.6% 3.8% 7.8% 8.1%
EBITDA Growth(%) 24.4% 5.3% 1.5% 12.0% 7.7%
Net Profit Growth(%) 22.9% 9.5% (2.5%) 12.2% 7.3%
Diluted EPS Growth(%) 22.4% 9.3% 0.4% 12.2% 7.3%
Turnover Ratios
Debtors (Days of sales) 94 87 98 98 98
Creditors 35 27 33 33 33
Inventory (Days of Optg.Costs) 0.1 0.1 1.5 1.5 1.5
Source: Company, KRChoksey Research

Exhibit 5: Free Cash Flow Analysis

YEMarch (INR Mn) FY16 FY17 FY18E FY19E FY20E
EBITA 287,901 303,240 305,353 343,550 368,334
Less:Adjusted Taxes 67,657 71,261 71,758 80,734 86,559
NOPLAT 220,244 231,979 233,595 262,816 281,776
Plus: Depreciation 18,879 19,870 22,676 23,891 27,422
Less: Increase in Working Capital 38,640 6,334 84,463 20,106 21,841
Operating Cashflow 200,484 245,515 171,808 266,601 287,358
Less: Net Capex 21,259 19,440 27,210 15,000 15,000
Less: Increase in Net Other Assets 18,100 (17,020) (41,731) 5,560 6,276
FCF From Operation 161,125 243,095 186,329 246,041 266,081
Less: Inc./(Dec.) in Investment 0 0 0 0 0
FCF after Investment 161,125 243,095 186,329 246,041 266,081
Plus: Gain/(loss) on Extraordinary Items 0 0 0 0 0
Total FCF 161,125 243,095 186,329 246,041 266,081
Source: Company, KRChoksey Research

ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576

Vaibhav Chowdhry, vaibhav.chowdhry@krchoksey.com, +91-22-6696 5571 is also available on Bloomberg KRCS<GO> www.krchoksey.com
Pritesh Thakkar, pritesh.thakkar@krchoksey.com, +91-22-6696 5429 Thomson Reuters, Factset and Capital IQ
India Equity Institutional Research II Result Update - Q3FY18 II 12th January, 2018 Page 7

TCS Ltd.
TCS Ltd. Rating Legend
Date CMP (INR) TP (INR) Recommendation Our Rating Upside
12-Jan-18 2790 2814 HOLD Buy More than 15%

13-Oct-17 2,548 2,757 ACCUMULATE Accumulate 5% – 15%

14-Jul-17 2,446 2,675 ACCUMULATE Hold 0 – 5%

19-Apr-17 2,283 2,583 ACCUMULATE Reduce -5% – 0

13-Jan-17 2,344 2,490 ACCUMULATE Sell Less than – 5%
19-Oct-16 2,400 2,570 ACCUMULATE
ANALYST CERTIFICATION:
We, Vaibhav Chowdhry (B.Com, MBA), research analyst and Pritesh Thakkar (MBA, B.Com), research associate, author and the name subscribed to this report, hereby certify that all of the views
expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to
the specific recommendation(s) or view(s) in this report.

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ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576

Vaibhav Chowdhry, vaibhav.chowdhry@krchoksey.com, +91-22-6696 5571 is also available on Bloomberg KRCS<GO> www.krchoksey.com
Pritesh Thakkar, pritesh.thakkar@krchoksey.com, +91-22-6696 5429 Thomson Reuters, Factset and Capital IQ