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Analysts raise TCS target price after strong Q2

Tata Consultancy Services' shares rose over 3% on Monday morning as the street cheered another quarter of strong growth. Many analysts feel it could continue its outperformance over local software services rival Infosys and have raised their target price on the stock.

October 22, 2012 / 02:16 PM IST
 
 
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Moneycontrol Bureau


Tata Consultancy Services' shares rose over 3% on Monday morning as the street cheered another quarter of strong growth. Many analysts feel it could continue its outperformance over local software services rival Infosys and have raised their target price on the stock.


Ashwin Mehta and Pinku Pappan of Nomura Financial Advisory and Securities India said that TCS' results were reassuring on growth sustainability, with bullish demand outlook and indications of a pickup in discretionary spending, growth across segments and large deal wins.


"Outperformance over Infosys to continue on better outlook and greater margin control," the two analysts said, but maintained their "neutral" rating on the stock citing valuations at 14 times FY14 earnings expectations. They have raised their target price to Rs 1,380 from Rs 1,300.


TCS late on Friday reported a better-than-expected 44% year-on-year (7% sequential) rise in second quarter net profit at Rs 3,512 crore, although its margins for the quarter declined 70 bps quarter-on-quarter to 26.8%.


CLSA raised concerns over this margin decline and expects the stock to "underperform," although it raised their target to Rs 1,290 from Rs 1,250.


"TCS has no doubt re-invested some of the currency gains in the business, we believe the deterioration in core profitability across the sector needs to be watched in the year ahead. Maintaining growth on a large base would require TCS to sacrifice some of its margin thresholds on deals and while the currency has buffered sector-wide margins through 2012, absence of that kicker could hurt ahead," it said.


However, Pratish Krishnan and Sarvesh Samdani of Antique Stock Broking still advise a "buy" on the stock, with target raised to Rs 1,430.


"With nearly eight quarters of revenue outperformance versus Infosys and likely strong earnings CAGR (compounded annual growth) of 20% versus peers (12-15%), we believe premium valuations are sustainable," the Antique analysts said.


Also Read: TCS sees environment being positive for renewals, deal wins


Here's how some other analysts rate TCS:


ICICI Direct: Though TCS' execution has been flawless, coupled with impressive earnings, valuations are not cheap. That said, we reiterate that long term investors should accumulate the stock at every opportunity. Consistent earnings upgrade could steer a rally in the stock. Rating: Hold. Target: Raised to Rs 1,370 from Rs 1,284.


IDBI Capital: TCS reported another stellar quarter with 4.8% constant currency (CC) growth, which is way ahead of Infosys (2.4%) and HCL Tech (2.9%) on account of superior volume growth.TCS is clearly operating in a different trajectory with 4.95% growth in Q2 on the back of 5.34% in Q1. Despite strong volume growth,  49 bps realisation decline in CC for TCS is concerning. Rating: Hold. Target:  Rs 1,315, versus Rs 1,250 earlier.


Spark Capital: TCS' broad service portfolio and leadership in service lines and verticals enables it to deploy various growth levers to drive revenue growth. We downgraded TCS to "add" from "buy" in June and believe absolute upsides are limited. Rating: Add. Target: Rs 1,375 versus Rs 1,290 earlier.


Systematix: Though we expect the company to maintain strong growth momentum in the coming quarters, we believe that current valuations factor most of the positives. Rating: Hold. Target: Rs 1,285.

TCS shares were trading at Rs 1,317.65, up 2.2% on NSE in late morning trade.

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