TCS Surpasses Q3 Expectations From Broad-Based Enterprise IT Demand; Shares Overvalued

Wide-moat Tata Consulting Services’ third-quarter revenue and profitability beat CapIQ estimates, with the IT-services firm attributing its strength to broad-based growth from its clients making both growth- and efficiency-oriented investments through TCS technology. Profitability was boosted from savings on travel costs and other selling, general, and administrative efficiencies. While TCS refrained from giving any guidance, we think some cost savings (like those on travel) will be partially undone in a recovery and some are here to stay, leading us to increase profitability expectations slightly over our explicit forecast. As a result, we are increasing our fair value estimate moderately to INR 1,880 from INR 1,830. Nonetheless, shares are still overvalued, in our view, as the company trades near INR 3,123 after results. But this does not take away from our view that TCS remains a high-quality company with significant opportunity.