TCS - Retains industry leading revenue growth, margin profile - Antique

Tata Consultancy Services (TCS) reported another strong quarter. USD revenues grew by 3.1% QoQ to USD3040m led by 4.4% QoQ growth in volumes. This compares with 0.8% growth in organic revenues and 1.8% QoQ growth in volumes reported by Infosys. Recurring EBIT margins stood at 27.5%, 30bps ahead of our estimate and are now ~400bps ahead of Infosys. PAT grew 6% QoQ and was led by higher margins and higher other income.

Management commentary continues to be bullish on deal flows/ pipeline. Highlighted improvement in discretionary spends and confident of exceeding Nasscom growth rate of 12-14% YoY. Post 4Q PAT beat we raise FY14E and FY15E by ~2% each. Roll forward valuation multiples to FY15E and raise target prices to INR1,615. With strong EPS CAGR of 15.5% over FY13-15E, likely strong outperformance vs peers, we think premium valuations are sustainable. Retain BUY.

Key highlights

Another quarter of strong volume growth

TCS revenues grew by 3.1% QoQ to USD3040m, 0.2% ahead of our estimates. However volume growth stood at 4.4% QoQ much stronger than 1.8% QoQ volume growth reported by peer Infosys. Recurring EBIT margins stood at 27.5%, 30bps ahead of our estimate. Reported margins stood at 26.5% and were impacted by one off expenses (USD30m) incurred for settlement of class action suit. Most of its key verticals (excluding telecom) showed growth. BFSI grew by 4.3% QoQ, while manufacturing & Retail grew by 3.1% each. Amongst services lines, infrastructure (6.6% QoQ), Enterprise solutions (6% QoQ), and ADM (3% QoQ) showed growth.

Strong management commentary... Likely strong 1Q & 2Q

Management expects FY14 to be better than FY13- expects to comfortably beat Nasscom guidance (12-14% YoY growth) in constant currency terms. During FY13- USD revenue growth stood at 13.7 % YoY (Constant currency 16.2% YoY). Expects strong growth from most sectors including BFSI. Even telecom as per management likely to see recovery. Highlighted that deal pipeline is strong and closure is happening. Sees traction in both run the business and discretionary spends. Closed 11 large deals during the quarter.

Recurring margins improve QoQ; Likely to maintain margins at current levels

Recurring EBIT margins improved by 30bps QoQ to 27.5% and was largely led by improvement in realisation (94bps QoQ). Utilisation excluding trainees stood at 82. % (vs. 73.8 Infosys). Sees further scope of improvement in utilisation levels to 83% Exuded confidence in improving employee productivity which should help retain margin performance.

Valuation and outlook

Stock trades at 18 FY14e vs. 14x for Infosys. With growth rates in 1H likely to be robust and given strong dealflows/ pipeline we expect FY14 growth to be ahead of peers. Reiterate Buy rating.

Source : Equity Bulls

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