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We increase our target prices on our coverage universe consequent to the upward shift in target price-to-earnings multiple for Tata Consultancy Services Ltd. (our valuation benchmark), as we adjust our valuation framework to the most recent 5-year history in place of the 5-year history pre-pandemic.
Not only has mean price-to-earnings value moved up amid market’s growing confidence in faster earnings growth in the foreseeable future compared to 3/5 year period pre-pandemic, the standard deviation has also seen a significant expansion (from 2.5 in the previous case to 4.2 in the latest framework) due to volatile events in the last 2 years.
The latter does indicate higher risk at current levels with little room for disappointment in fundamental performance.
On the positive side, we see a trifecta that will drive price-to-earnings multiple expansion
(1) faster revenue/earnings growth
(2) higher cash flow conversion
(3) higher return of capital to shareholders.
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