TCS - Quarter trending as per expectations - Elara Capital

December quarter in line with TCS management expectations

We attended the sellside analyst meet held by TCS where it emphasized that contrary to soundbytes on slack IT demand environment, December quarter is largely tracking along its own expectations. While hitech and manufacturing would be weak in line with seasonality, BFS was marginally weaker beyond seasonality. TCS however maintained that inspite of weakness, BFS would deliver positive volume growth for the quarter. All the horizontals as well as geographies are seeing consistent growth. On margins, TCS is holding on to its 27% margin benchmark for FY13 inspite of a weaker December as it expects a rebound in the Q4 from lower planned additions. Subcontracting expenses will continue to remain higher. Campus hires target of 25k for FY14 stands as TCS is now confident that it will be able to add according to need rather than put pressure on utilizations. Other income will be in similar ranges as last quarter with around 30-35crs of forex loss on option premium charges.

First feeds of CY13 spending trends positive

While management asked investors to wait for the January call for a detailed feedback on CY13 trends, the first feeds are positive. Most clients have spoken about multiple spend areas which will get budgets in CY13 with a good number of initiatives in the discretionary space. TCS also hopes to gain an incremental share given that vendor consolidation still remains the theme. TCS has maintained a strict focus on margins with gross margins monitored on a project level basis (ex of bench). On an organization wide basis as well, TCS has been keeping other expenses line on a tight leash.

TCS looks to maintain market leadership as model holds

From our conversations with the management on the sidelines, it seems that there are ample opportunities in terms of tweaking execution to squeeze out margins. TCS pointed out that IP/product is definitely not the only way to fight commoditization as products have a very long investment phase. Even on current scale, TCS is quite comfortable on just in time additions to billable resources. They also seemed to opine that over a portfolio of projects, there is still room to deliver efficiencies at the project management level. While at our target price, valuations are stiff, we believe that current stock price gives investors an opportunity to enter with a multi-quarter perspective.

Source : Equity Bulls

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