Hold TCS; target of Rs 1160: Emkay

“TCS reported revenues at US$ 2,728 mn (+3% QoQ), inline with Emkay est (+2.9% QoQ) aided by lower than expected cross currency impact (-100 bps V/s est of ~150 bps) with a strong volume growth of ~5.3% QoQ (benefiting from full qtr consolidation of Friends Life business as well). EBITDA margins declined by ~40 bps QoQ to 29.1% (we estimated flat margins sequentially aided by currency depreciation) impacted adversely by wage hikes (8% offshore hikes and 2-4% onsite), higher visa costs and decent hiring in the qtr. Profits at Rs 32.8 bn (+12% QoQ) were a tad short of expectations on a/c of lower margins and forex losses (we est forex gains), however compensated by higher other income and lower taxes. Amongst geographies, North America grew by 2.8% QoQ (higher than peer Infosys at +1.6% QoQ) with BPO accounting for 60%+ of incremental revenue addition during the current qtr helped both by rampups of business from certain telecom (+6% QoQ) and media(+3% QoQ) clients and Friend’s Life consolidation. Further top 10 clients grew by 2.3% QoQ, growing lower than co average for the 6th qtr in a row.”

“TCS management remained confident of growing higher than Nasscom growth range in constant currency terms indicating that the despite the challenges in the macro environment, deal pipeline remain healthy. We note that TCS requires a 3-4% CQGR through the next 3 qtrs to report a 13-14% US$ revenue growth in FY13 which in our view could become challenging driven by pricing pressures as also evident from decline in revenue productivity for both Infosys and TCS who reported today.”

“We moderate our US$ revenue estimates and build in a 12%/13% YoY growth for FY13/14 V/s 13.5%/16% earlier , however lower currency resets drive a 6%/1% raise in our FY13/14E earnings to Rs 67/72 respectively. Valuations at 19x/18xFY13/14E P/E limit any absolute upsides and we believe that TCS’s premium valuation to peers adequately capture near term higher visibility for the company. HOLD stays with a revised TP of Rs 1,160 (V/s Rs 1,150 earlier),” 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.