Hold TCS; target Rs 1136: KRChoksey

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Hold TCS; target Rs 1136: KRChoksey

KRChoksey has recommended hold rating on Tata Consultancy Services (TCS) with a target price of Rs 1,136, in its January 19, 2012 research report.

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KRChoksey has recommended hold rating on Tata Consultancy Services (TCS) with a target price of Rs 1,136, in its January 19, 2012 research report.

"Tata Consultancy Service, we are disappointed by overall performance of the company especially due to lower than expected volume growth (despite stellar performance by domestic business i.e. 14.8% QoQ growth in Q3FY12), continued decline in employees productivity leading to lower than expected EBITDA margin and higher than expected forex losses adversely impacting Net profit margin. Moreover, the management commentary of delay in decision making and ramp-up of discretionary projects impacting Q4FY12 volume growth came as negative surprise particularly after considering their positive commentary at the end of Q2FY12. Taking into account tone down in management commentary about discretionary spending by the clients and slower volume growth expectation in Q4FY12 after missing our expectation for international business in Q3FY12, we believe there are no near term positive triggers for the stock."

"Overall volume growth of the company stood at 3.2% QoQ in Q3FY12, which is lower than our expectation of 4.5% QoQ volume growth. Further, we are concerned about the fact that International Business's volume growth has tapered down significantly to around 2.2% QoQ in Q3FY12 (considering 14.8% QoQ in Domestic Business) as compared to around 7.3% QoQ growth in Q2FY12. We believe, primary reason for significant slowdown in International Business is delay in decision making and ramp-up of discretionary projects as reflected from the management's survey showing that around 50% respondent clients across markets and industries are indecisive above their discretionary spend."

"EBITDA margin improved by 192 bps QoQ to 31% (as per Indian GAAP) in Q3FY12 against our expectation of improvement in margins by 260 bps QoQ primarily led by dip in employees productivity by 94 bps QoQ in Q3FY12. The decline in productivity came as negative surprise especially after considering dip in Q2FY12 by 74 bps QoQ. The improvement in EBITDA margin was primarily led by INR depreciation against the major global currencies which supported margins by 282 bps QoQ."

"The company reported forex losses of Rs.301 crore in Q3FY12 against our projection of Rs.159 crore. Higher than estimated forex losses and lower than estimated EBITDA margin led lower than expected net profit of Rs.2,803 crore in Q3FY12 against our forecast of Rs.3,023 crore. Considering, lower than expected volume growth in Q3FY12, indication of modest growth rate in Q4FY12, tone down in the management expectation of growth in discretionary areas in near term and recent INR appreciation trend against USD, we recommend "HOLD" on the stock with a price target of Rs 1,136 by assigning multiple of 18 times (around 5% premium to Infosys's target P/E multiple) to its FY13E EPS of Rs. 63.1 (we have assumed average exchange rate of Rs 47.5/USD in FY13E)," says KRChoksey research report.

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To read the full report click on the attachment