Buy TCS; target of Rs 1230: Prabhudas Lilladher

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Buy TCS; target of Rs 1230: Prabhudas Lilladher

Prabhudas Lilladher is bullish on Tata Consultancy Services (TCS) and has recommended buy rating on the stock with a target of Rs 1230 in its January 17, 2012 research report.

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Prabhudas Lilladher is bullish on Tata Consultancy Services (TCS) and has recommended buy rating on the stock with a target of Rs 1230 in its January 17, 2012 research report.

"Tata Consultancy Services (TCS) reported Q3FY12 results in line with our consensus/expectations. The management indicated no worrying signs from clients' IT budget perspective, however, indicate delay in decision-making for discretionary portfolio. Moreover, we continue to believe that the company has fully utilized its operating leverage."

"TCS reported Q3FY12 results in-line with our consensus/expectation. Revenue grew by 13.5% QoQ to Rs132.04bn (PLe: Rs131.94bn; Cons: Rs131.57bn) and 2.4% QoQ in USD terms, led by betterthan- expected volume growth of 3.25% QoQ (PLe: 4.7%). EBIT margins expanded by 213bps (PLe: 219bps, Cons: 193bps) to 29.2%. EPS grew by 18.4% QoQ to Rs14.75 (PLe: Rs14.59, Cons: Rs14.10). In the survey conducted with top 120 clients of TCS, two-third indicated no cut in IT budget or uptick in the IT budget for CY12. However, top 20 clients indicated no cuts. In another survey conducted by the company for 130 discretionary projects, there is delay in ~50% of those projects. But, some of those projects have already kick-started and few are likely to be started in Q4FY12. In a nut-shell, there are no worrying signs from top clients."

"TCS' top 10 clients reported muted growth. We believe that the growth from top 10 clients has peaked as the top clients mining is already at an extreme. As in our previous note ("Lacks positive surprise-restrict upside", October 17, 2011), we highlighted that FY11-12 growth was more predictable (existing clients), helping them to operate at high utilization. We believe that onsite would increase as growth would come from new clients, impacting margins in-line with our hypothesis. Also, unpredictable growth would require TCS to keep utilization at sub 80% level. We expect 14% volume growth, with positive pricing bias for FY13. However, we expect margin headwinds to dampen EPS gr. We reiterate 'BUY' rating, with a TP of Rs1,230, 18x FY13E earnings estimate," says Prabhudas Lilladher research report.

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To read the full report click on the attachment