Buy TCS; target of Rs 1165: FIFL

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Buy TCS; target of Rs 1165: FIFL

Fortune Interfinance (FIFL) is bullish on Tata Consultancy Services (TCS) and has recommended buy rating on the stock with a target price of Rs 1165 in its January 19, 2012 research report.

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Fortune Interfinance (FIFL) is bullish on Tata Consultancy Services (TCS) and has recommended buy rating on the stock with a target price of Rs 1165 in its January 19, 2012 research report.

"Tata Consultancy Services (TCS) reported 3Q revenues of $2.59b growth of 2.4% qoq - in line with consensus. Constant currency growth was ~4.5% qoq. Volumes increased ~3% qoq while realizations increased ~200bps qoq. EBIT margins expanded ~210bps to 29.2%. Net profit came in at Rs. 28.9b lower than our estimates primarily due to higher forex loss of Rs. 3b."

"TCS indicated that there are delays in decision making on discretionary projects which could impact project ramp-ups in Q4. The commentary is consistent with that of other Indian IT Services companies and indicates a slower growth trajectory in the near term. Gross employee addition at 19,000 vs 20,000 in Sep quarter gives confidence on outlook. Gross hiring for year likely to end at 66,000 vs 60,000 target. Campus offers for FY13 at 43,600 up 18% yoy. Management sounded a note of caution on 4Q volumes, citing that 50% of discretionary project discussions getting delayed, though not cancelled. EBIT margin expansion of 213bps was on account of favorable forex movement (282bps), other factors (45bps), partially offset by lower margins in certain new deals undergoing transition or takeover of employees (94bps), more near shore presence (10bps) and higher provisions (10bps). We believe as volumes ramp & near shore centers achieve scale, margins should improve."

"While TCS management has indicated that the macro economic conditions did not have a negative impact this quarter, but the demand commentary seem to be weaker than the one in the last quarter. We at FIFL believe that decision making delays could impact volume growth for 4Q12 & 1QFY13 post which better macro environment could result in deals fructifying. We reduce TCS' FY13 US$ revenue growth estimate to 11% on decision making delays and likely budget cuts. At the CMP of Rs 1,075 the stock is trading at 16.2x FY13E EPS. 'BUY' recommendation on the stock with a target price of Rs 1,165 based on 17.75x FY13E EPS," says Fortune Interfinance research report.

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To read the full report click on the attachment