Jan 15, 2013 06:35 PM IST | Source:

Accumulate TCS; target Rs 1451: KRChoksey

KRChoksey is bullish on Tata Consultancy Services (TCS) and has recommended accumulate rating on the stock with a target price of Rs 1,451 in its January 15, 2013 research report.

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KRChoksey is bullish on Tata Consultancy Services (TCS) and has recommended accumulate rating on the stock with a target price of Rs 1,451 in its January 15, 2013 research report.

"TCS reported modest volume growth of 1.25% in Q3 FY13 (in-line with our expectation) led by seasonality factors and onetime furloughs in 2 key clients in BFSI. However, the management sound upbeat about growth prospects in CY13E/FY14E in the backdrop of better customer clarity in respect about areas they want to invest/spend money in the coming year, which in turn is expected to lead to timely decision making and ramp-up of projects by clients unlike in CY12.Further, the company expects higher spending on discretionary projects by clients in CY13E supported by timely decision making, as clients had adopted wait and watch policy in CY12 inspite of setting aside budget for such projects.  Taking into account the improvement in demand outlook for CY13E, we increase our revenue estimates for FY14E and expect the company to clock revenue growth of ~16% YoY (in USD terms) in FY14E as compared to our projection of revenue growth of 14% YoY (in USD terms) in FY13E. We believe there is scope of upside to our revenue estimates for FY14E, as we have considered the same CQGR (i.e. 3.6% in USD terms) in FY14E that is expected to be registered by the company in FY13E, although demand environment is set to improve in next 12 months.

The company reported revenue growth of 2.65% QoQ in constant currency terms (versus our expectation of 2.5% QoQ) in Q3 FY13 led by volume growth of 1.25% QoQ and increase in realization (on account of change in service mix) by 1.3% QoQ.  The growth was registered across geographies (except Continental Europe on completion of some of projects), verticals (apart from Telecom which is expected to register volatility on quarterly basis in FY14E) and service line (Consulting registered double-digit for the second consecutive quarter).

EBITDA margin improved by 53 bps QoQ to 29% in Q3 FY13 against our expectation of decline in margins by 23 bps QoQ. Higher than expected EBITDA margin was led by decline in SG&A expenses (excluding employee cost) by 9% QoQ (contributing 63 bps QoQ to margins) and unexpected increase in employees’ productivity despite lower number of working days.

Management expects spending on discretionary projects to improve in FY14E supported by traction in demand for analytics, big data, front office transformation, and enhancement of end-customer experience by clients across industries; and regulatory compliance and risk management by BFSI clients. Beside increase in spending on discretionary projects, the company expects timely decision making and ramp-up of contracts by clients.

Considering improvement in demand outlook for CY13E/FY14E and ability of the company to improve EBITDA margins even in a seasonal weak quarter i.e. Q3 FY13, we maintain our "ACCUMULATE" recommendation on the stock with a price target of Rs. 1,451 by assigning multiple of 18 times to its FY14E EPS of Rs. 80.6," says KRChoksey research report.

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