TCS tops IT biz with all-round, consistent results: Experts

Tata Consultancy Services topped market expectations on Monday with a third-quarter net profit of Rs 3,551 crore, up 1 percent (23 percent from a year-ago), helped by new deals clinched. India's largest software services exporter's revenue rose 3 percent sequentially (22 percent year-on-year) to Rs 16,070 crore.

IT-sector analysts Bhavin Shah, CEO, Equirus Securities and Basu Banerjee, of Quant Research explain to CNBC-TV18 that TCS has retained his numero uno position in the IT sector by the sheer size of its results and all-round performance through out the quarter.

However, Bhavin Shah is a bit cautious and forecasts that the upside in the stock is limited based on estimated that the rate of growth for the future will not be in excess of 12-13 percent.

Below is an edited transcript of Bhavin Shah's analysis on CNBC-TV18

Q: Infosys surprised the street with its stellar results on Friday and that has placed a lot of pressure on TCS to outperform. So, what do you making of the results? Has TCS been able to maintain its No.1 position?

A: Clearly by size, TCS retains its number one position. This quarter's results were just marginally above the subdued expectations on sales, but the profit was a good 5-6 percent above expectations. So, TCS has clearly posted a good set of results. The company's annual growth rate in dollar-terms seems to be stabilising around 13-14 percent based on last two-to-three quarters’ results.

Q: What is your call on TCS in the light of the results that have come in?

A: We have had a short rating on TCS, a 'sell' rating essentially because of the valuations. We think that growth rate going forward is not going to be in excess of 12-13 percent though the company continues to enjoy high multiples. That is the primary reason why we think that the absolute upside is limited in the stock.

Below is an edited transcript of Basu Banerjee's analysis on CNBC-TV18

Q: Do you think TCS has lived up to expectations?

A: Yes. Qualitatively speaking, TCS' results are much better than that of Infosys. The improvement in revenue-mix was all-round lead by a strong volume mix and improvement in constant currency realisation. The revenue was much ahead of my estimate of USD 2,922 million, at USD 2,948 million. Operating margins quarter-on-quarter improved by 60 bps, to 29 percent.

In comparison, Infosys had a 50-bps cut in operating margins quarter-on-quarter and TCS' utilisation stayed flat quarter-on-quarter, the utilisation of Infosys actually dropped quarter-on-quarter. The prime driver of Infosys’ positive surprise was consulting and system integration, horizontals moving up 16 percent quarter-on-quarter which led to high realisation and high margin horizontals.

_PAGEBREAK_

But for TCS, the results are positive all-round- good improvement in realisation, surprise in margin terms and definitely a PAT level of over Rs 3,500 crore, which is a big positive surprise.

Q: The street seemed to be in a mood to switch to Infosys post Friday’s results from Infosys. CLSA had an 'outperform' on Infosys and a 'sell' on TCS. But after today’s results from TCS, do you see any re-jigging or rerating?

A: For TCS, I suppose the street price-to-earnings (PE) multiples are already on the higher side at 16-18 times. So, rolling forward to FY15 will be the only driver of major increase in price target. I don’t think that street will give more than 18 times PE to TCS.

But Infosys has been going through troubleD times and that is why there were several cut in targets, PE multiples down to 14-15 times. So, now with one quarter of good results several houses have gone back to those target multiples of 17 times and that is why price targets have moved up massively with just one quarter of good performance.

But if you look at TCS historically, it has consistently given good results and this is another quarter of good results. So, I think the organic improvement in earnings, in terms of revenues and margin improvement should lead to a price target upgrade rather than any need for a PE upgrade.

Q: So what is your call on TCS for the near-term?

A: Post today’s results we would increase our earnings target by 4-5 percent for FY14. We will be rolling forward our price target to FY15-based results. So, definitely we are looking forward to an over-20 percent upside even from the current market price for TCS, based on FY15.

Q: What are your expectations from the IT segment as a whole for the third quarter?

A: I will continue to favour HCL Tech. Wipro has been going through a bad phase in terms of volume growth, pricing and margins. I don’t expect any massive improvement in just one quarter for Wipro. HCL Tech is at the lower end of the value chain. Primarily through the infrastructure horizontal, it has been growing robustly and margins have improved massively to 21-22 percent.

The company has added almost USD 2.5-3 billion in deals in the past three quarters which are being executed currently. I am confident that HCL Tech would continue the strong momentum. In fact, HCL is going through a phase of rerating. So, further upgrades if earnings positive surprise comes both in terms of earnings moving up and PE increasing across the street.

However, I don't expect much from Wipro. It has run-up quite a bit because of this good set of numbers from Infosys and the demerger proposal. So, I don't see much of a positive momentum from the current market price of Wipro.