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Research
Accumulate TCS - Elara Capital
Posted On : 2010-07-16 09:24:49( TIMEZONE : IST )
- Rating : Accumulate
- Target Price : INR867
- Upside : 11%
- CMP : INR782 (as on 15 July 2010)
Volume performance vindicates our confidence
TCS came up with a 6.2% QoQ revenue growth led by 8.1% volume growth (pegged back by currency to the extent of 1.09%). BFSI grew 6.5% in constant currency terms and TCS continues to see a very strong deal pipeline there. However, we understand that the margin performance was helped by collection of bad debts to the extent 95bps. Even if we take that out, margins dipped only by 131bps QoQ (against Infosys margin drop of 236bps). As we had argued in our preview, productivity improvements helped TCS by 210bps on the margin, countering effectively the negative QoQ wage hike impact of 215bps.
Europe, deal pipeline enthuse; no PADA impact seen
UK and the continental Europe grew by 5.1% and 1.2% respectively in constant currency terms as TCS won 10 large deals this quarter. There was no specific update on the much talked about UK public service contract as the management seemed confident on containing any impact thereof.
Pricing dynamics better than Infosys, gross adds target hiked
Though TCS delivered a largely flat pricing for the quarter, the management is expecting a spike from Q4 FY11. TCS has hiked its gross additions target for FY11 to 40000 from 30000 earlier. Attrition stands at 13.1% (against 15.8% for Infosys) hence, a larger proportion of the hike is likely to be purely demand led rather than to negate attrition.
TCS is the clear winner among top 3
As our target price suggests, we are most bullish on TCS among the top three IT vendors and our conviction has been reinforced by this quarter's performance. We are adjusting both the gross addition numbers and tax rates in our numbers, and our estimates remain largely the same. We maintain our target price and Accumulate rating on the stock on the back of the healthy volume growth and lower margin headwinds compared to its more illustrious peers. Stock currently trades at PE of 19.4x FY11 estimates (vs Infosys at 22.6x FY11).
