Hold TCS; target of Rs 1264: KRChoksey

“TCS, volume growth of 5.9% QoQ in International Business was significantly higher than our and consensus expectation; which was supported by growth across geographies (except India) and industries (except Energy & Utilities). The management maintains its target of growing higher than NASSCOM upper end guidance range of 14% YoY growth (in USD terms) in FY13E. They are not witnessing any stalling of deals ram-up and expect clients to stick to their IT budget for CY12. We believe slowdown in Infosys is more company specific trend rather than industry related issues and the companies (such as TCS and HCL Technologies) which are offering strong value proposition in run-the-business segment will continue to outperform peer sets in terms of revenue growth. However, we believe revenue growth outperformance in FY13E is already reflected in its premium valuation to Infosys and there is limited upside left in the stock in near term and hence maintain our “HOLD” recommendation on the stock.”

“The overall volume grew higher than our expectation i.e. 5.3% QoQ in Q1FY13 against our expectation of 3.7% QoQ growth; supported by full quarter impact of ramp up of Friends Life contract which came into effect from March 2012. However, the dip in revenue from product segment by 12% QoQ in USD terms and major portion of incremental revenue contributed by BPO segment (supported by ramp up of Friends Life contract) i.e. USD50 mn QoQ led decline in blended billing rate by 106 bps QoQ (in constant currency terms) in Q1FY13. EBITDA margin dipped by 36 bps QoQ to 29.1% in Q1FY13 against our expectation of decline in margins by 11 bps QoQ. The higher than expected dip in margins was led by unexpected drop in revenue productivity in Q1FY13. However, we believe in coming quarters major portion of incremental revenue will come from service-lines other than BPO (as indicated by the management) leading to improvement in revenue productivity and in-turn assisting margin improvement (excluding impact of exchange rate movement).”

“We believe that the company’s higher growth rate than industry’s average in FY13E and stable EBTIDA margins in FY13E is already reflected in its premium valuation i.e. around 30% higher forward P/E multiple compared to Infosys forward P/E multiple; hence we maintain our “HOLD” recommendation on the stock with a price target of Rs. 1,264 by assigning multiple of 18 times to its FY13E EPS of Rs. 70.2,” says KRChoksey research report. 

FIIs holding more than 30% in Indian cos

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