TCS - Strong 1Q; Well set for another good year - Antique

Tata Consultancy Services (TCS) reported another strong quarter. USD revenues grew by 4.1% QoQ to USD3165m led by 6.1% QoQ growth (best in eight quarters) in volumes. This compares with 3.4% growth in volumes reported by Infosys. EBIT margins declined 47bps to 27%, 32bps lower than our estimate. TCS was able to offset the full impact of wage hike through gains from currency depreciation.

Management commentary continues to be bullish on deal flows/ pipeline. Unlike peer Infosys, TCS reported strong growth across all key verticals (including telecom), geographies and service lines. Highlighted improvement in discretionary spends and retained its view of a likely strong growth for the year. Post 1Q we raise FY14E and FY15E earnings by 8-9% each. Expect stock to rerate given scope to expand margins and likely strong EPS CAGR of 20% over FY13-15E. Raise target price to INR1,850 (18xFY15E), retain BUY rating on the stock.

Impressive volume growth

TCS revenues grew by 4.1% QoQ to USD 3165m, 0.5% ahead of our estimates. Volume growth stood at 6.1% QoQ much stronger than 3.4% QoQ volume growth reported by peer Infosys. Recurring EBIT margins stood at 27%, 32bps lower than our estimate. While wage hike impacted margins by 170bps, it was able to offset through gains from currency depreciation (160bps) gain. With wage hike cost now fully absorbed in1Q and given weak INR vs USD, margin expansion not ruled out. PAT during 1Q grew 1% and was impacted by forex losses during the quarter.

All key verticals, services & geographies showed strong growth

Unlike peer Infosys, most of its key verticals (including telecom) showed growth. BFSI grew by 3% QoQ, while manufacturing & retail grew by 3% & 9% QoQ respectively. Even telecom grew by 7% QoQ. Amongst geographies North America grew by 6% QoQ and Europe and UK grew by 5% & 9% respectively. Only India revenues declined by 10% during the quarter led by seasonality and weak macro. Almost all key services lines showed growth. ADM grew by 4% QoQ, testing by 8% QoQ. Consulting like Infosys showed strong growth of 18% QoQ. However contribution of consulting to growth was 13% vs 60% reported by Infosys.

Strong management commentary... Likely strong year

Management reiterated that deal pipeline and deal wins remains robust and FY14 likely to be better than FY13. Commented that it has seen good traction in annuity, traditional and transformational business. Deal sizes have improved and discretionary spends are improving in US markets. Closed 11 large deals during the quarter.

Valuation and outlook

Stock trades at 16x FY15e 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 with revised target price of INR1,850.

Source : Equity Bulls

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