Maintain HOLD on TCS – TP Rs.1280 - Geojit BNP Paribas

- Hold recommendation is maintained on TCS with a target price of Rs.1280 over one year.

- The company reported inline numbers for Q2FY13, with creditable USD revenue growth of 4.6%, QoQ. This is against Infosys' 2.6% and HCL Tech's 3.2% growth.

- EBIT margins, which reduced by 75 bps, QoQ, was lower than estimates mainly because of a shift towards onsite employees as new deals ramped-up and also due to higher growth in lower-margin emerging markets.

- Net Income was higher than estimates due to higher other income and lower taxes.

- The company has plans to hire 25000 for FY14 as against 35000 at this stage last year. The attrition was lower and the company indicated that it could hire overseas and laterally when needed.

- At the same time, the utilization rate of employees is expected to rise from current 73% to 75-76%.

- Management commentary was generally positive with 11 large deal wins in Q2 and another 20 in the pipeline.

- Although Q3 is expected to be soft due to client holidays, TCS was positive on maintaining its FY13 target of beating NASSCOM's industry growth estimate of 11-14%.

- Doubts are on whether TCS would be able to maintain margins if USD/INR reverses (flattish margins, YoY, despite a 19% drop in USD/INR), but the company is confident it can pull back investments and manage costs to do so.

- Margins seems to have peaked and valuations are currently at 17.6x FY14e P/E. Although TCS is a solid company in the IT sector, it is expected to trade sideways.

Source : Equity Bulls

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