Angel Broking recommends Buy on TCS with a Target Price of Rs 2,470

Tata Consultancy Services (TCS) hosted an analyst briefing with Mr. Rajesh Gopinathan, CFO. Following are the key takeaways of the event: Strong demand environment with no change in outlook: The Management indicated that overall demand remains good and in line with its expectations, with 1HFY2015 expected to grow faster than 2HFY2015. This is expected to be led by the likely return of discretionary spending, increased penetration in Europe and that the company has not seen any ramp downs or cancelations in projects in recent weeks.

Seasonality-led weakness in revenue growth in 4QFY2014: 4Q has traditionally been a relatively soft quarter in terms of volume growth for IT companies and this year is expected to be no different. We believe TCS is likely to deliver a 2.7-3% qoq volume growth in 4QFY2014 but this should not be any indication of slowdown in demand. The Management indicated that along with expected seasonal softness in international revenues (vs 3Q), domestic revenues are also likely to be weak in 4QFY2014 due to hit in IT spends ahead of the upcoming Central Government elections. Cross currency is unlikely to have any material impact on USD revenues in 4QFY2014.

Industry wise and geography wise trends: The Management indicated that revenues from the US and UK could grow in line with company average while Latin America is expected is grow faster than company average. The Europe region continues to see strong growth driven by increasing penetration. Demand trends continue to be decent across verticals. TCS expects smaller and emerging industry verticals such as lifesciences, energy & utilities, media and travel & transportation to grow faster than larger industry verticals such as BFSI, manufacturing and retail. The telecom vertical continues to see some structural challenges.

Operating margin to decline marginally: TCS expects EBIT margins to decline by ~40-50bp qoq largely due to ongoing investments to enter newer geographies and services lines. The company maintained that margins may stabilize in the 27%-28% band in the long term.

Stable other income: Other income during 4QFY2014 is likely to be flattish as USD/INR rate remains largely unchanged during the quarter. Given the volatility in recent quarters, the company may evaluate a change in accounting norms for forex gains/losses.

Outlook and Valuations: We expect TCS to outperform the industry on the revenue growth front due to its superior market reach and excellent execution capabilities. Management commentary on demand trends for FY2015 continued to be reassuring led by a favorable demand environment and market share gains. We expect TCS to grow its USD revenues at a CAGR of 16.5% over FY2013-15 and EPS at a CAGR of 25% during this period. TCS has executed well over the past many quarters and currently trades at 18.5x FY2015E EPS. We believe TCS' premium multiples are well deserved given consistency in performance and leadership in growth/profitability. We maintain our Buy rating on the stock with a target price of Rs. 2,470.

Source : Equity Bulls

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