Accumulate TCS - Q1FY13 Result Update - Kotak

TCS' 1QFY13 operating results were largely in line with our expectations. While revenues came in higher than estimates, operating margins were lower. Volume growth at 5.3% (3.3% in 4QFY12) was encouraging and compares favourably with about 2.7% reported by Infosys.

- However, a 1.3% drop in realisations was discomforting. Management attributed a part of the decline to pricing renegotiations. The company has been cautious about pricing and sees low probability of like-to-like improvement. EBIT margins were lower QoQ, largely on the back of healthy employee additions, higher visa costs and salary increments. Rupee depreciation mitigated some of that impact.

- On the demand side, the commentary from the management was positive. While the overall macro scene remains uncertain, budget spends have eased and the spend / budget ratio has improved. It has also not seen any delays in decision making. The company has adequate visibility into the client spends and into its own share within those spends, we believe. The management has maintained its optimism of beating NASSCOM's target growth rate of 11% - 14% (USD terms) in FY13 in CC terms.

- TCS won 8 large deals (6 in 4QFY12) during the quarter. Significant hiring during the quarter also indicates good visibility for FY13. TCS added 4962 employees on a net basis.

- We make changes to our earnings estimates, largely on the back of currency fluctuations. FY13 earnings are expected to be Rs.68.8 per share (Rs.63.7 earlier). Accordingly, we change our PT to Rs.1290 based on FY13 estimates (Rs.1205 earlier). We have accorded valuations to TCS, which are at a premium to Infosys. TCS' revenue growth in the past few quarters has been better than Infosys and it has been able to restrict impact on margins. The stock has moved up in the past quarter by about 20%. Looking at the limited upside, we recommend ACCUMULATE (BUY earlier), while remaining positive on the long term prospects of the company. The stock should be bought at every decline. A sharp appreciation in the rupee against various currencies and a delay in recovery in major user economies remain the key risks to our call.

Source : Equity Bulls

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