TCS' Top Line Shines While High Employee Attrition Continues; Shares Overvalued

Tata Consultancy Services reported mixed first-quarter results. The top line came in well above our expectations while the bottom line disappointed due to a host of margin pressures. Nonetheless, we continue to believe that the majority of margin pressures will be short-lived, and indicators from TCS support this. TCS estimates that while employee attrition should rise in the second quarter, the metric should moderate after that. We reiterate our INR 2,700 fair value estimate as our confidence remains in the company's wide moat, stemming from a triad of sources: switching costs, intangible assets, and cost advantage. However, as the shares trade near INR 3,266 (down about 1% on results), we believe the market is overly optimistic on margin expansion potential in the long run as the benefits of labor arbitrage ought to moderate. We view the shares as overvalued.