TCS’ 2Q Sees Softer Results Than Expected as TCS Focuses on Capturing Demand Over Margin Expansion

Wide-moat Tata Consulting Services' second-quarter results were not what we had hoped for, coming in below our expectations on the top and bottom lines. Results were even more surprising as the company reported a stellar talent attrition rate relative to the industry at 11.9% in the quarter, which it claimed was the lowest in the industry. Such attrition comes as a shock as the entire IT services industry has been suffering from a significant talent shortage as the coronavirus has accelerated demand for digital transformation services, with some companies experiencing attrition near 20%. While nice attrition rates were not enough to help drive margins to year-over-year expansion in the quarter, they still represented an uptick from attrition over the past year, and soft results were forgivable, in our book. The company explained that its primary focus over the quarter was to meet demand, rather than expand margins. Ultimately, we are increasing our fair value estimate to INR 2,500 from INR 2,000 as we factor in a lower cost of equity for this high-quality name. Nonetheless, shares are up 1% upon results, leaving the IT services giant trading in overvalued territory, in our view. We continue to consider much of the IT services industry as overvalued.