TCS (Consolidated) - Rating: BUY; Target Price: Rs2,580 - Centrum

During the quarter, we expect subdued revenue growth (2.7%/2.1% in USD/INR terms) due to a revenue drag from furloughs and leave - especially in the US. We also expect India revenues (6.9% of revenues as of 2QFY14) to show a sequential decline as domestic IT spending has reportedly been weak. We expect USD reported revenues to have some tailwinds from USD-GBP gains (35-45 bps) and similarly from USD-EUR gains as well (8-10bps) without helping margins (as onsite costs for these countries are mostly fixed in local currencies and not in USD)

We expect EBITDA margins to decrease sequentially by 77bps due to the currency as well as the effect of slightly higher employee costs due to higher lateral and local onsite hiring. We do not expect reported utilizations to suffer much from furloughs and holidays as TCS reports utilization excluding holidays and paid-time-off (PTO).

We expect PAT to increase 4.8% QoQ as forex losses narrow sharply (last quarter's losses were heavy due to the range options that TCS has which perform badly in periods of unexpected volatility) and we expect a total QoQ swing of Rs4.2Bn in Other Income.

Target price revised upwards slightly as we cut forex loss estimates and roll over to Dec'14: We are increasing our FY15E EBITDA/PAT by 4.4%/4.2% assuming increased USD-INR realizations (64.7 Vs 62.2 earlier) and reduced forex losses. We roll over estimates and introduce our new Dec'14 target price of Rs2,580 (17x 1year Fwd EPS at Dec'14) and maintain BUY rating on the stock.

Source : Equity Bulls

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