TCS an outperformer; target of Rs 1400: Karvy

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TCS an outperformer; target of Rs 1400: Karvy

Broking house, Karvy Stock Broking has recommended an outperformer rating on Tata Consultancy Services with a target of Rs 1400.

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Broking house, Karvy Stock Broking has recommended an outperformer rating on Tata Consultancy Services with a target of Rs 1400.

Karvy Stock Broking report on Tata Consultancy Services:

We expect TCS to report a sequential revenue growth of 7.2% to Rs 48.05 billion, with 94% of revenues accruing from software and consulting services. TCS is undertaking revenue rebalancing by growing the offshore revenues and increasing the T&M constituent for the past couple of quarters, and it would get accentuated further in this quarter.

In terms of client addition we expect it to add 70 odd clients, with total   number of USD 50 million increasing to 13. What is significant despite record number of client additions, the revenue per client has been steadily   increasing which indicates that most of the projects are front ended.  

In terms of revenue mix by geography TCS would be relatively less affected (on account of rupee appreciation) as US accounts for 55% of revenues against an industry average of 65 - 70%. With revenues from Europe increasing at a steady pace and it has sizable presence in India, we believe any appreciation against US dollar would not impact, as there would be concurrent depreciation against Euro dollar.   

Since most of the integration related expenditure is in the final leg, we don't expect any significant increase in payment to subcontractors, and there won't be any provisioning towards doubtful debts. Consequently we expect the operating margins modestly increase by 30bps to 27.7%,  despite rupee appreciating by 2.5% over the previous quarter.   

On account of strong revenue growth, we expect its net profit to sequentially increase by 9.7%, despite modestly factoring higher tax rate. One thing that we want to clarify is the Operating margin reported by the company would include depreciation, but we in order to set standard financial reporting norms remove the depreciation from the operating expenses, hence there will be a margin difference between what we have stated in our preview and the reported actual would be.

We expect the company to report an earnings growth of 40% for FY07 and 28% for FY08, and the current valuations continue to maintain our out performer rating on the stock.