The Tale of Two Markets; Tata Consultancy Services Sees a Q1 Divergence in Core Market Performance

Wide-moat Tata Consulting Services kicked off fiscal 2022 with a mixed quarter that had strong top-line growth in the Western markets offset by a sharp decline in revenue stemming from the Indian market. The company’s bottom line clocked in slightly below our expectations. While the fall in revenue from India can be ascribed to the vast impact COVID-19 had on the country, management sees the situation stabilizing and expects a quick return to form in the upcoming quarters. We reiterate our confidence that enterprise IT modernization projects, many of which were put on hold at the start of the global pandemic, will come back online, thereby providing economic tailwinds to IT services firms like Tata. At the same time, however, even after factoring in significant growth ahead, we still view the firm as overvalued after maintaining our fair value estimate of INR 2,000.