Neutral on TCS - Q4 FY 2011 Result Update - Motilal Oswal

Tata Consultancy Services (TCS IN; Mkt Cap USD52.6b, CMP Rs1,192, Neutral)

TCS' revenue and margins were broadly in line with our expectations.

Volume growth of 2.9% QoQ was reasonable given: (1) weak seasonality, (2) lackluster volumes at Infosys (-1.4% QoQ) and (3) recent cautious commentary from IBM in terms of services order signings.

PAT was above estimate at Rs24b. Significantly higher other income (Rs2.2b against our estimate of Rs0.4b) drove the outperformance in PAT.

Discretionary spends are picking up as reflected by 18.3% QoQ growth in Enterprise Applications. The deal pipeline is stronger than at the same time last year.

Net employee addition of 11,700 in 4QFY11 and guidance to recruit 60,000 employees over FY12, especially in an environment of likely declining attrition, reflects TCS' comfort and visibility over the sustenance of strong demand.

Our EPS estimates remain largely unchanged at Rs52.3 for FY12 (~Rs52 earlier) and Rs61.8 for FY13 (Rs61 earlier). We believe TCS' robust growth expectations are already built into consensus and our estimates, leaving little room for further significant upgrades. However, we believe the expectation of continued outperformance is already reflected in its steep multiple of 23x FY12E and 19x FY13E. We expect the stock to consolidate near current levels in the best case scenario or to undergo some correction. Maintain Neutral with a target price of Rs1,236 (20x FY13E EPS of Rs61.8).

Source : Equity Bulls

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