TCS a top pick, see 10-15% upside in 6 months: JM Financial

India's top software services exporter Tata Consultancy Services' fourth quarter result has cheered the street. Its consolidated Q4 net profit grew 23% year-on-year and 1.6% sequentially to Rs 2,932.4 crore. The management has also given a positive outlook for FY13.

In an interview to CNBC-TV18, Govind Agarwal, sector head & senior analyst of JM Financial Institutional Securities says, TCS should remain a top pick in the sector. “Despite today’s move, we expect about 10-15% movement on the stock over the next six months,” he asserts. Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: How would you map TCS after what we have heard about FY13 from the management? A: TCS should remain a top pick in the sector. Despite today’s move, we expect about 10-15% movement on the stock over the next six months. Clearly, the outlook for the company is very positive compare to the peer group. They are talking about guidance of more than 15% growth for FY13. The deal outlook is also promising about the company. If you look at growth across verticals, across geographies, the company has outperformed the peer group comprehensively in the March quarter. The dollar growth is at the top end of the peer group. The volume growth, even the growth in banking vertical, growth in North America, they have done better than the peers. Even the commentary is definitely more positive, more bullish than the peer group. Even hiring guidance, the wage inflation indicate towards a good year for TCS for FY13. We remain positive on the stock. Q: The management is talking about 14% growth being very doable. How much are you upping targets by both in terms of what you expect to see in volume growth for FY13 and whether you have enhanced your EPS targets any? A: We were already at the top end of street expectations for the quarter end and for FY13. Our EPS is Rs 68 for FY13, which is almost 5-6% ahead of consensus. So, we have maintained our estimates. We are penciling 15% revenue growth in dollar terms for FY13, largely driven by volume growth and stable margins. So, we have maintained our estimates. But street should increase the numbers by around 4-6% over the next six months. Immediately, I don’t think street will increase numbers meaningfully. They will still wait for a June quarter number. But going forward on a six-month street should increase numbers by around 5% easily for FY13. Q: What’s your order of preference in the top 4 IT stocks right now? A: The order of preference is TCS and HCL are preferred. Infosys, given their muted guidance, we are currently not very positive on the name. Given the stock correction, Infy is now almost 14 times FY13 earnings. The stock has also corrected more post the results and today also stock has corrected. So, even Infy looks a re-warrant now at current price point. Q: What is the fair valuation multiple to accord to TCS in your eyes? How much of a premium would you give it to the rest of the sector now, given this performance? A: PE multiple will be 15-17 times, I would say one year forward. This multiple will be a function of the near-term growth. If growth is robust, if growth is on a quarterly basis of more than 5-6% or 5%, it will be in the higher range of the PE band. On the multiple premium compared to the sector peers, 10-15% premium will be warranted given the current outperformance by the company. Q: You mentioned that TCS is your top pick. What’s the rating following that? How are you approaching stocks like Wipro and HCL Tech? A: Among the large caps, currently only TCS is ‘buy’ rated. Infosys, Wipro and HCL all are ‘neutral’ rated currently. Q: Any thoughts on any of the mid cap IT names? Is there anything that you track there and now overweight on at this point? A: Among the midcaps, we are positive on MindTree, Hexaware and eClerx. So, at this point of time, we have more buys in the midcap space than in the large cap space. It’s probably first time in the last three-four years. In all these companies, the common thing will be revenue growth. If revenue growth is ahead of industry growth rates then companies can sustain margins and drive EPS growth. So, revenue growth is critical for the sector to maintain margins and grow EPS and sustain valuations.