TCS - Rich valuations; initiate with Hold - Anand Rathi

With relatively lesser exposure (~79%) to the troubled US and Europe over peers and the highest FPP contracts (48%), TCS' costs are in check and growth on track. We expect a 15% US$ revenue CAGR over FY12-15. Though its EBITDA margin could drop 200bps in FY15 (to 27.4%), profit is estimated to post 17.7% CAGR. We initiate coverage with a Hold and a target of Rs.1,350.

- Business outlook. In its 2QFY13 commentary, management was confident of: (1) surpassing NASSCOM estimates (on constant currency); (2) a normal year (in terms of seasonal trends - 2H to be slower than 1H); (3) stable pricing, except for some disruptive behaviour by certain vendors; (4) healthy deal pipeline and normal closure rates, with instances of discretionary spends returning; and (5) no budget cuts by clients in the near term. This is in striking contrast to what Infosys said in its commentary.

- FPP, emerging markets to keep growth ticking. Of the large cap Indian IT companies, TCS has the highest FPP contracts (48% of TTM revenue), which helps it hold costs. Further, it has lower exposure to the troubled markets of the US and Europe (~79%) than its peers.

- 15% revenue CAGR in FY12-15 (18.5% in rupees). We expect TCS to record a 15.0% US$ revenue CAGR over FY12-15e. Its EBITDA margin could drop 200bps in FY15, to 27.4%, and profit post 17.7% CAGR. In the past two years, it has outperformed Infosys in revenue and PAT growth. We expect this outperformance to continue.

- Valuation. We value Indian IT services companies on P/E relative to their past trading range. We value TCS at 17.5x FY14e with a target of Rs.1,350, which is justified since it is expected to report 17.7% earnings CAGR over FY12-15. Risk. Below estimated ramp-up in key growth areas (US and Europe) and in BFSI would prove detrimental to our estimates and rating.

Source : Equity Bulls

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