TCS - Good execution; likely strong exit for the year - Antique

Tata Consultancy Services (TCS) reported another strong quarter. USD revenues grew by 3.3% QoQ to USD2,948m led by 1.3% QoQ growth each in volumes and pricing. This compares with QoQ growth of 1.5% and 1.8% in volumes and pricing, respectively, reported by Infosys. EBIT margins stood at 27.3%, 75bps ahead of our estimates and was driven by price realisation. Consequently, PAT was 5% ahead of our estimates.

Management commentary continues to be bullish on deal flows/pipeline. Indicated potential improvement in discretionary spends (augurs well for Infosys) and expects CY13e to be better than CY12. Post 3Q PAT beat, we raise FY13e and FY14e earnings estimates by 5% and 3% and raise our target price to INR1,450 (from INR1,430 earlier). Reiterate BUY.

Key highlights

Growth in traditional services and consulting are the key highlights

TCS revenues grew by 3.3% QoQ to USD2,948m, 0.5% ahead of our estimates. Margins improved by 51bps QoQ to 27.3% and PAT grew by 1% QoQ, 5% ahead of our estimates. While volume growth at 1.25% was lower than our estimates and compared to peers (Infosys' 1.5% QoQ), we note that growth was broad-based and in line with trends reported by Infosys. Most of its key verticals (excluding telecom) showed growth. BFSI and manufacturing grew by 2.5% and 7% QoQ, respectively. Amongst services lines, infrastructure (6% QoQ), consulting (10% QoQ), and IP revenues (7% QoQ) showed growth.

Expects CY13e to be better than CY12

Management retained its positive outlook for CY13e and expects it to be better than CY12; indicated that clients have a lot more clarity on key initiatives and areas of spend. Highlighted potential pick up in discretionary spends which should help fuel growth in CY13e vs. CY12.

Margins improve QoQ; sees further scope to improve utilisation rates

EBIT margins improved by 51bps QoQ to 27.3% and was largely led by improvement in realisation (80bps QoQ). Utilisation excluding trainees stood at 81.7% (vs. 73.2 Infosys). Sees further scope of improvement in utilisation levels to 83% Exuded confidence in improving employee productivity which should help retain margin performance. Attrition rates in IT services declined to 9.8%, lowest in the industry.

Valuation and outlook

Stock trades at 17x FY14e vs. 15x for Infosys. With strong growth rate YTD and likely steady 4Q, company likely to exit the year on a strong footing. See scope for earnings upgrade led by recovery in macro. Reiterate BUY with a target price of INR1,450.

Source : Equity Bulls

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