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Tata Consultancy Services (TCS) has delivered an encouraging performance in 2QFY18 with its USD revenue growing by 3.2% QoQ. While volume growth came in at 3.2% QoQ, CC pricing remained flat. Aided by operational efficiency and decent growth in revenue, its EBIT margin rose by 171bps QoQ (exceeding our estimate by 38bps), which led to 8.4% QoQ growth in PAT to Rs64.5bn (in-line with our estimate).
From vertical perspective, the key BFSI vertical grew by 3.5% QoQ (marginally above company average), while Manufacturing and Communication & Media grew by 3.2% QoQ each, Technology & Services by 5.8% QoQ, Life Sciences & Healthcare by 4.7% QoQ, Travel & Hospitality by 12.1% QoQ and Energy & Utilities by 8.4% QoQ. Thus, some key verticals of TCS witnessed decent traction. Geographically, while Europe grew by a healthy 7.1% QoQ, the UK and Continental Europe clocked 4% QoQ and 10.7% QoQ growth, respectively. North American geography grew by 2% QoQ, while Latin America clocked a strong 8.1% QoQ growth. TCS’ UK-based life and pensions processing subsidiary, Diligenta signed a 15-year deal which could boost revenue growth. The company would share more details about the deal subsequently.

Margin Performance Positive
TCS managed to deliver in-line performance on revenue front. Further, there are positive signs on margin front as well, with EBIT margin rising by 171bps QoQ to cross 25% aided by improving traction in several verticals. Encouraged by these positive signs, we believe that the company will come reasonably close to achieve the lower end of its oft-stated EBIT margin band of 25-26%.

Outlook & Valuation
Post 2QFY18 performance, we are encouraged by seemingly renewed traction in TCS’ business. Apart from retail and regional markets, all other verticals achieved either in-line or better than company average growth. Looking ahead, the 15-year deal for Diligenta could boost revenue growth, though the details of the deal are still awaited. The IT major’s share buy-back is also likely to lead to superior EPS growth compared to PAT growth, as was seen in 2QFY18 (EPS growth of 10.8% QoQ vs. PAT growth of 8.4% QoQ). Given these factors, we believe that the stock will be able to command a higher multiple, going forward. 
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