TCS - Healthy performance, Robust outlook - Sunidhi

Tata Consultancy Services (TCS) results exceeded our expectations, while maintaining a decent demand growth environment for its services. In Q1FY13, the revenues of TCS grew 12.1% QoQ (in INR terms) and 3% QoQ (in USD terms), while growing 4% in constant currency terms. Volume growth of 5.3% QoQ (vs our expectation of 3%) was higher than expectations. EBIT margin declined by 20 bps QoQ on account of wage hikes, increased visa costs, but was higher-than-expected. We upgrade the stock to "Neutral" and raise our target price to Rs.1,330 per share on account of healthy revenue visibility in key markets and deal wins.

Key Details: I. Pricing was down 1% QoQ due to change in service mix; II. Attrition (IT Services) was lower QoQ at 10.9% with 4,962 net addition (11,832 in Q4FY12), and 7,041 (5,681 in Q4FY12) lateral addition; III. Utilisation (including trainees) was higher at 72.3% (71.3% in Q4FY12); IV. TCS has maintained its hiring target of 50,000 for FY13. V. TCS has closed 8 large deals across verticals, services and geographies. VI. EBIT margin movement OoQ break up is as follows: Forex movement +276bps QoQ, wage hikes-200bps, productivity shift -117bps, SG&A +18bps, offshore +3bps. VII. Stressed verticals like BFSI and retail grew 5.6% and 8.3% respectively in constant currency basis.

Healthy outlook in a tough macro environment: TCS expects to grow faster than NASSCOM estimated growth rates (11-14%). TCS is seeing better IT spends, ramp up in its clients in US as compared to earlier. It has also started seeing discretionary spends coming back. TCS believes that even the subdued vertical, Telecom is likely to do well for FY13, and it grew 7.6% in cc terms for the quarter. The fact that TCS has given an 8% wage hike to its offshore employees (vs a freeze at peer) clearly indicates TCS is seeing better traction in terms of its business outlook and business prospects are not as bad as painted by Infosys.

SAP declares interim 2Q results - strong set of numbers. SAP saw its revenue increase 19% YoY in constant currency basis to 1.06bn Euros, towards the higher end of the guidance. It had guided to 15-20% increase in cc terms. This strong set of results do point to a healthy demand in discretionary spend as has been indicated by TCS as well.

Valuation: We assume coverage with a Target Price of Rs.1,330 and a Neutral rating on the stock. We increase our target to Rs.1,330 (from Rs.1,126 earlier), implying 18x FY14E EPS of Rs.74 (16x earlier), to account in for deal wins, management confidence and a show of continuous above-industry-execution.

Risks: TCS' higher exposure to BFSI and Europe than peers like Infosys may place it at a higher relative risk.

Source : Equity Bulls

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