Tata Consultancy Services - Strong execution, again - Standard Chartered Securities

OUPERFORM, TCS IN, CMP INR 1660, Price Target INR 1830

- 1QFY14 revenue growth came in marginally ahead of IER estimates, driven by a surge in business volumes (+6% q/q).

- TCS stays confident in its FY14 outlook - 10 large deal wins and selective revival in discretionary services lend support.

- Its selective large/mega deals participation ensured a stable volume/margin trade-off + a continued fresher intake over FY13 and helped manage the FY14 wage hike impact.

- Despite the strong 1Q volume momentum, IER expects EPS upgrades mainly from INR reset, given the skewed volume-realisation equation and low headcount addition.

- IER retain OP although the stock could consolidate nearterm, given the sharp 9% MTD rally; raise price target to INR 1,830 (vs. INR 1,730) on lower regulatory risk.

1QFY14: Volume growth was the surprise. Consensus revenues grew 4.1% q/q to USD 3.2bn, net of +6.1%/-2.0% q/q reported volume/realization changes. The sharp business volume growth was a surprise as equipment sales fell 25% q/q (TCS reported volume growth also includes hardware and licence sales besides billed effort). EBITDA margin expanded 29bp q/q to 28.6%, in line, as INR depreciation neutralised wage hike impact. PAT at INR 38bn (+6% q/q) was slightly below estimates (INR 39bn), on FX losses of INR 1bn.

Mid-range volume outlook is stable. Ten large deal wins in 1Q added to 18 wins over 2HFY13. However, <1% addition to FY13 headcount base despite high utilization (72.5%) was a surprise. TCS plans joining of CY12 campus offers (25,000 gross) from 2QFY14. Given the volume/realization asymmetry in 1Q, IER has broadly retained its USD revenue outlook - 17% in FY14 including the Alti acquisition (to integrate from 2QFY14).

Reinvestments of INR gains. TCS retained the view of FY14 EBIT margin in a narrow band around 27%; it plans to reinvest incremental gains from INR depreciation. This is as expected; IER expects Tier-1 players to leverage currency gains in potential mitigation of regulatory risks (such as increased onsite/nearshore capacities) + build market share in large annuity deals. Thus, our FY14/FY15 EPS forecasts are broadly unchanged after the recent INR reset.

Maintain OP. TCS is the best execution play in the sector. Nevertheless, the 6% rally since its 1Q14 results partially captures heightened expectations. IER thus expect near-term moves to be ranged. Its revised PT of INR 1,830 (from INR 1,730) values TCS at 18x 12-m forward EPS (vs 17x earlier) on lowered risks from the proposed US immigration reform bill.

Source : Equity Bulls

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