TCS - Not as robust as it looks - Ambit

TCS's 4QFY13 results were in line with consensus estimates and slightly ahead of our estimates, with USD revenue growth of 3.1% QoQ and EBIT margins of 26.5%. This was driven by strength in Infrastructure services and Enterprise solutions. The India business (traditionally a volatile business) accounted for ~47% of incremental revenue, while growth is weaker in traditional markets such as US (up 2%) and UK (down 2%) that raises questions about the strength of the offshore outsourcing market.

TCS' ability to maintain margins despite the likely dilution from India and the one off impact of employee settlement is heartening. A chunk of this margin surprise stems from efficiencies emanating from its Infrastructure management business, particularly maturing of older contracts where resources have been right sized. Finally, management remains upbeat of beating NASSCOM's guidance and maintaining EBIT margins at 27% despite the dilution from Alti. We however see margin risks from this dilution worsening visa regulation and continued commoditization. Whilst this is credible performance, it does not convince us about an improvement in demand conditions for offshore outsourcing in FY14.

We find shares fairly priced and remain Sellers.

Source : Equity Bulls

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