Brokerage firm CLSA has given an 'outperform' rating for Tata Consultancy Services (TCS), stating that the company's healthy cash generation, a liberal capital return policy, and macro demand strength should sustain its relative outperformance versus the broader market.

CLSA has set a price target of Rs 3,560 for the stock.

The brokerage note states: "The order books are strong and the management has reiterated expectations for a double-digit revenue growth in FY2022."

TCS has also absorbed the margin impact of the two acquisitions-led large deals in the fourth quarter of 2021 and while it reverts to a normal annual wage hike or promotion cycle in FY2022, it downplayed any abnormal supply-side pressures.

The company’s consolidated revenue grew by 5 percent quarter-on-quarter (QoQ)to $5.9 billion, broadly in line with expectations. CLSA estimates a 3.4 percent QoQ growth excluding the two acquisitions-led deals (Pramerica Financials and Postbank IT).

The brokerage firm further added that the company’s growth continues to be broad-based. A 4.2-percent QoQ constant currency (CC) growth was led by sustained traction in manufacturing and retail, and stability in financial services excluding the two acquisitions.

Communications slowed marginally after a strong third quarter of 2021. Earnings before interest and taxes (EBIT) margin was broadly stable at 26.8 percent despite the 50 basis points (bps) estimated headwinds from the two low-margin acquisition-led large deals. Profit before tax (PAT) was up 15 percent year-on-year to Rs 9,250 crore, above estimates, states the CLSA report.

The report also mentioned that the company's strategic priorities are changing. Management indicated a shift in strategic focus from growth alone to moving upstream and aligning with the transformation spend of clients. This is reflected in the order-book profile. The company now has a significant share of smaller deals ($50-100 million contract value). Now, the company has individual projects over multiple years rather than a single large deal. While this limits long-term revenue visibility, it will help in margin defense. The FY22 and FY23 EBIT margin estimates are now higher by 60 bps and 50bps, respectively.

CLSA also states, "The company’s free cash flows grew at a 12 percent compound annual growth rate (CAGR) over FY2016-21." CLSA expects this growth to sustain over FY2023-24 though there could be moderation in FY 2022 with normalisation in working capital.

(Edited by : Jomy)