TCS - In-line quarter; outlook robust despite India weakness - Religare

TCS reported an in-line Q3FY14 with 3% QoQ US$ growth led by a relatively soft 1.8% volume growth. International revenues grew 3.8% QoQ while India declined sharply. EBIT margins were down 40bps QoQ to 29.7%, in line with expectations. The company continues to indicate a healthy demand outlook, with CY14 expected to be better than CY13. While the big beat was missing in the quarter (on a weak India performance), we think superior execution would continue to support TCS' valuation premium vis-à-vis the sector.

In-line quarter, $ growth dragged by India: Revenues at US$ 3.44bn were up 3% QoQ (RCMLe: 3.1%) driven by 1.8% volume growth and 0.7% pricing realisations. International revenues grew by 2.9% QoQ CC and 3.8% in reported terms, indicating continued traction. EBIT margins came in at 29.7% (RCMLe: 30%), down 40bps QoQ due to FX losses. PAT for the quarter was at Rs 53bn (+50% YoY), ahead of estimates on higher interest income.

International revenues healthy: International volumes (ex-India) were up 2.9% QoQ. In INR revenue terms, Europe/APAC/Americas grew by 4%/5%/1% QoQ while India declined 9%. Manufacturing/Telecom and Healthcare revenues grew by 6%/5%/6% QoQ INR while BFSI and retail remained muted (both +1% QoQ INR).

Management indicates CY14>CY13, but maintains soft India outlook: Management commentary on the demand outlook remains positive and suggested that growth in CY14 is likely to better than in CY13. However, India business outlook remains weak due to the upcoming national elections.

Valuations and view: While the stock is not cheap at 21x 1-yr forward, we think a strong growth outlook and consistent earnings delivery will support the valuation premium. We continue to see TCS as the best execution play in the large-cap IT space.

Source : Equity Bulls

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