TCS - Seasonal Weakness in Q3FY14 - Sunidhi

TCS CFO indicated seasonal weakness in Q3FY14 due to impact of holidays and furloughs, however company re-iterated the positive medium to long term revenue visibility. The management has indicated that CY14 is likely to be better than CY13 in terms of revenue growth which will be driven both by efficiency and spend on newer digital technologies. Revenue in Q3FY14 to be affected by seasonality. Management has also indicated stable margin outlook for Q3FY14 which is ahead of street expectations. On account of correction in the stock, we revise our rating to "Outperform" but maintain our target price of Rs. 2,360.

Revenue in Q3FY14 to be affected by seasonality: a) TCS continues to expect H2FY14 to be weaker than H1FY14. On account of lower billing days and furloughs, revenue growth in CC terms in Q3FY14 is expected to be lower than in Q2FY14. Service line-wise, application maintenance and infrastructure management service should do better than discretionary services. b) Geography-wise, Europe is expected to post better growth, while the US and UK may post lower growth. c) The Indian market is likely to be weak, given its project-based nature and the fact that Q2FY14 was a good quarter for the business. The election season seems to be impacting government spending on IT projects.

Stable margins for Q3FY14: a) Margins are likely to be stable on CC basis, while owing to rupee appreciation there could be a 25bps-30bps negative impact. b) Below the margins, TCS could post forex gains of Rs. 1.5bn-Rs. 2.0bn compared with Rs. 3.8bn loss in Q2FY14, providing a boost to PAT.

Growth Outlook: a) It maintained its commentary on good revenue growth in CY14, with the year likely to witness better growth than in CY13 aided by the US economic recovery and good traction in Europe, which will be driven both by efficiency efforts and spend on digital technologies. b) As far as client budgets and expectations for FY15 is concerned, it would only get clearer in the next one month. As far as any initial indicators of the demand environment are concerned, budgeting cycle this time is more positive than previous years.

Valuation: TCS has robust revenue visibility - looking at deal wins, ramp ups, hiring pattern even in the tough environment. We model 16.1% growth in USD terms in FY15E (~3.5% CQGR through FY15E) on top of a 16.7% growth in FY14E. TCS is trading at 19.2x FY15 EPS estimate. We maintain our target price of Rs. 2,360, implying 22x FY15E EPS of Rs. 107, to account in for deal wins, given consistency in execution and best-in-class revenue predictability. On account of correction in the stock, we revise our rating on the stock to "Outperform".

Source : Equity Bulls

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