Motilal Oswal neutral on Tata Consultancy Services

Motilal Oswal has maintained neutral rating on Tata Consultancy Services with a target of Rs 1230, in its June 4, 2012 research report.

“Tata Consultancy Services (TCS) remains convinced of the huge potential for growth, given the large and steadily-expanding addressable market, and the relatively low current level of penetration. However, persisting macroeconomic challenges, slower GDP growth, slower job growth, and continued currency volatility cloud the prospects in the short term.”

“TCS is pursuing three strategic initiatives to drive non-linear growth - Software Products (TCS Financial Solutions), Platform-based BPO, and iON. TCS Financial Solutions increased its client base by adding 39 new clients in FY12. Through its Platform-based BPO offering, it services segments like Life Insurance and Pension Policy, Analytics and Finance and Accounts. iON is being marketed through a channel partner network of 109 cloud service providers, and now has 256 mid-market customers. TCS has managed to maintain its EBITDA margin within a band over FY05-12 (EBITDA margin was 28.9% in FY05 and 29.5% in FY12). Though manpower costs increased by 550bp during this period (from 45% of revenue to 50.5%), this was offset by aggressive cost management. Non-manpower expenses declined by 620bp during this period (from 26.2% of revenue to 20%). TCS' payout ratio (excluding special dividends) has increased over the years, from 27.6% in FY05 to 37.2% in FY12. Of the total cash generated during this period, ~40% has been returned to shareholders through dividends and ~9% has been spent on acquisitions.”

“Despite the company's outperformance in 4QFY12 and positive stance on the outlook for FY13, the headwinds in BFSI remain a key risk. At 19x FY13E earnings, we believe the stock prices-in the high growth expectations, which will be difficult to exceed. While we expect TCS to outperform peers on revenue growth in FY13, we do not see the risk-reward as favorable at current levels. Maintain Neutral,” says Motilal Oswal research report. 

Public holding more than 90% in Indian cos

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More