Accumulate TCS; target of Rs 2789: Kotak Securities

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26 Aug, 2025 12:21

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Kotak Securities research report on Tata Consultancy Services “TCS, management has indicated that, it will be able to sustain the EBIT margins between the 26% - 28% band. In 1Q, EBIT margins were impacted by the one-time depreciation charge of Rs.1.73bn (79bps impact) effected in 1Q, due to the change in the Companies Act. While this will not recur in 2Q and will help improve margins, the consolidation of the Mitsubishi JV financials will likely offset these benefits. Overall, we expect margins to improve QoQ in 2Q on better efficiencies, rupee depreciation and the waning of impact of salary hikes. Utilisation levels excluding trainees were at 85.3% in 1QFY15 (83.8% in 4QFY14). The management is not concerned about the higher utilization rates because of the increase scale of business and the higher number of employees on the bench in absolute numbers. It also hopes to use levers like increased automation, higher non-linear revenues and other operational improvement initiatives, to sustain EBIT margins around the 27% mark (26% -28% range). We have assumed EBIT margins at 28% in FY15 and 28.6% in FY16 v/s 29.1% in FY14. TCS accounts for bench and trainee costs in SG&A rather than in direct costs.” “The management has maintained its outlook of beating FY14 growth revenue rate in FY15. EBIT margins will likely be around the 27% mark. Growth in 2Q is expected to be driven by all verticals except Insurance. The JV with Mitsubishi is expected to start contributing in 2Q, with revenues of about $100mn. We expect FY15 USD revenue growth, including Mitsubishi JV, to be 17.5% (16.2% in FY14E) and FY16 growth to be 13%. EPS for FY15 and FY16 are expected to be at Rs.113 per share and Rs.130 per share. We have been maintaining our positive view on medium term demand growth, over the past few quarters. We accord a premium to TCS as compared to peers. In the past several quarters, TCS has reported industry - leading growth rates with sustained margins. We revise PT to Rs.2789 (Rs.2519), based on FY16E estimates. The stock has risen post 1QFY15 results. Looking at the 6% upside, we maintain ACCUMULATE (Buy the stock at declines),” says Kotak Securities research report.

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