TCS - Q4 weaker than Q3, FY15 to be better than FY14 - Prabhudas Lilladher

We attended Tata Consultancy Services' (TCS') "Sell-Side Analysts' Briefing". The management indicated a weaker Q4 as compared to Q3 due to seasonality in selected geographies, verticals and service lines. According to the management, FY15 is likely to be better than FY14, led by deeper penetration into newer geographies and services. Moreover, the commentary indicated confidence of delivering ~2.3% QoQ (PLe: ~2.5% QoQ @cc) growth in Q4FY14.

- Q4FY14 likely to be weaker than Q3FY14: According to the management, Q4FY14 is likely to be touch softer than Q3FY14 in constant currency terms. The growth is likely to be weaker in Europe (seasonality), India (spending freeze due to election) and ME/APAC, whereas the US and the UK are likely to grow in line and LatAM is likely to be stronger than group's revenue.

- FY15 likely to be better than FY14: The end of the budgeting session has indicated that FY15 will be better than FY14 in constant currency terms. Moreover, the stronger performance has factored in higher discretionary spend, i.e. led by Application Development (including SMAC), Package Implementation (instance consolidation, Cloud migration), etc. Moreover, the smaller verticals and geographies are likely to grow stronger driven by deeper penetration.

- Stable currency to prompt investment: The management will continue to make investment in the business to drive growth in under-penetrated verticals, services and geographies, if currency stays in the narrow range. In Q4FY14, the investment would have a negative impact of 30-40bps.

- No cross-currency tailwind, status-quo in other income - Possible accounting changes in forex: Q4FY14 is likely to have minimal cross-currency (~+10bps) impact. Also, other income (interest income + forex) is likely to be the same as the previous quarter. The management indicated a possible change in forex accounting standard to reduce the earnings volatility.

- Reiterate "Accumulate" with TP of Rs2560, 20x FY16E earnings estimates. We expect near term weakness in price due to weaker than expected Q4FY14.

Source : Equity Bulls

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