Hold TCS; target of Rs 1150: Emkay

“After the sharp disappointment at Infy, TCS continued to deliver on course with expectations with a 2.4% QoQ US$ rev growth (Emkay est of 2.3% QoQ increase). EBITDA margins declined by ~150 bps QoQ to 29.5% (we estimated ~190 bps decline) with gross margins declining by ~20 bps QoQ only despite strong headcount addition/drop in utilization. Profits at Rs 29.3 bn (+1.6% QoQ) beat est. driven by better than expected margin show and lower taxes. Opmetrics performance in our view was mixed with Fin Svcs declining by 0.2% QoQ despite some inorganic help however was still better than peers Infy (-4.7% QoQ) and HCLT (-2.7% QoQ). Others segment grew by 23% sequentially on the back of a 20% QoQ growth in Dec’11 qtr and contributed to ~50% of the seq revenue increase. Amongst geographies, US grew by ~3% QoQ (yet again better than peers Infy and HCLT who reported QoQ declines). Top clients continued to be a drag with top clients growing lower than average for nearly 5 qtrs now.”

“TCS’s mgmt commentary remains confident despite the fluid demand environment (and should further reassure investors after an inline show by HCL Tech that demand is not falling ‘off the cliff’ as Infy results indicated) . While fin svcs rev were down marginally by 0.2% QoQ, mgmt remains confident of pick up in business from Q1FY13 onwards given that 3 of the 6 large deals announced during the qtr came in from the segment. Further mgmt indicated that it was seeing ‘better visibility’ than the recent months as rampups on some of the discretionary projects have started. Company plans to roll out ~8% offshore wage increases (6-10% range) and ~2-4% onsite wage increases for FY13 and plans to hire ~50k people on a gross level in FY13( V/s 70k+ in FY12). We note that utilization remains the biggest op margin lever for TCS in FY13 (down ~600 bps from historical highs) given that the company has built a significant bench through FY12.”

“We retain our FY13/14E earnings at ~Rs 63.2/71. Rollover to FY14 earnings drives an increase in TP to Rs 1,150 (V/s Rs 1,075 earlier). In our view TCS’s results/commentary continues to indicate that although demand remains fluid, Infy’s struggles are primarily company specific and other peers continue to fare relatively better. ‘Lack of negative surprises’ is good news in our view and stock could trade firm given reasonable results and a confident commentary,” says Emkay Global Financial Services research report.   

Institutional holding more than 40% in Indian cos

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.