See TCS FY09 EPS at Rs 61.20; tgt Rs 1065: Karvy

Excerpts from CNBC-TV18’s exclusive interview with R Ravi:

Q: What’s your verdict on TCS and the brutal damage the stock has seen over the last week or two?

A: The results in revenue terms are pretty much in-line, but in terms of margin contraction it is a little more severe than what I anticipated. The company is not able to improve the utilization rate since the top clients account did not grow in anticipation, to an extent the Q1 results are a bit disappointing. The bigger disappointment was the severity of the treasury loss; treasury loss close to Rs 72 crore, is a bit surprising. Overall as Mr. Ramodrai (of TCS) was saying, the growth is more back-ended and is not a big threat to the earnings of Rs 61.20 for the full year but definitely Q1 was a little negatively surprised.

Q: You have a price target going as well, for TCS?

A: The price target is at Rs 1065, and I am maintaining it. I am also giving a buy rating on the stock. Rupee is in the favor of the sector at this point in time because it is going to keep sliding. If it stabilizes at around Rs 43 to a dollar levels, companies like TCS should at least get around Rs 2,500 crore of extra revenue just on account of the rupee depreciation. With rupee on the slide mode, larger IT companies should benefit as they have a larger operating leverage to play out. These companies should be viewed positively in the current environment.

Q: Any thoughts on what happened with HCL Tech and the big forex loss they reported?

A: They were not doing the mark-to-market on a regular basis and they have to wind up at some point of time as was expected. When I do my quarterly and annual forecasts, I see the direction of the rupee and the position that they have. If it is going against what its position is, then I immediately do mark to market(MTM). For Infosys and TCS, I did the MTM but what surprised me is the way it eventually turned out. So the severity is a little bit more than what is expected.

Q: Do you think you need to re-look at some of the mid-tier companies in the light of how they are dealing with the forex because Mindtree also had a few scars to show, earlier it was HCL Tech, so what do you expect from the rest of the pack?

A: I may have to lower their other income significantly but what will be neutralized is the rupee. Earlier when I was doing the model at the beginning of Q1, I assumed the Rupee-Dollar to be around Rs 40 or Rs 41.5 but now it has gone down to Rs 43 to a dollar. So, in terms of EPS there is not going to be a significant impact but it would be qualitatively much better. But the other income would be lower on account of the rupee depreciation.

Q: Do you think these kinds of discounts that TCS is trading at from Infosys now, about 20% plus PE gap is sustainable over a period of time given the relative performance seen between the two majors?

A: TCS should go up, because the worst is behind them. People feared too much from the large account of TCS and as a result they are trying to bank it down. Secondly, there is a fear that TCS might sell some of the promoter holdings going forward as well. Both the fears are being played too much and once that subsides, the gap should narrow down and probably go back to what Infosys is currently trading at.

So, TCS should see a much sharper spike but the fear that people have including myself is that TCS has got a larger number of L1s (visa) than the total strength. As a result, the wage revisions as well as the wage rebalancing that is required would award the margins going forward if L1s are prohibited from making a softer developments in the US and that fear still continues to exist. Once all the onside employees of TCS come under H1B and as long as we don’t see the full impact of it on the margins, it will continue to trade. It should not be trading at a huge discount to Infosys.

Q: TCS doesn’t give an annual guidance but analysts were quite disappointed about the fact that Infosys didn’t up its dollar guidance, are you confident about this full back-ended growth theory?

A: What clients have told the larger ones is that probably the volume growth will come through from Q2 onwards. Even if the dollar guidance remains static in terms of meeting their rupee revenue guidance for the full year, it can be easily met. Say for example after the Infosys revenue guidance, the revenues was more than 10%. In terms of TCS, I would probably increase it by 3-4%.

What is aiding the growth even if you are to assume that the volume and the PE remain constant is going to be the rupee. So, the rupee revenues in the profit and loss account by FY09, should be a little more than what I am currently forecasting.