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Spark Capital: TCS: Strong results; Retain top pick amongst large cap




Spark Capital Advisors(India) Private Limited


22 Oct 2012





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TCS: Strong results; Retain top pick amongst large cap TCS reported strong results with US$ revenues growing 4.6% qoq and EBIT margins declined 70bps largely due to higher revenues from emerging markets. Growth was across verticals / geographies and service lines with Manufacturing and RIM reporting excellent growth. Management’s commentary continues to be cautiously optimistic with no further delay in decision making by clients. Further, management is confident of growing revenues ahead of NASSCOM estimate which is a positive according to us. TCS broad service portfolio and leadership in service lines and verticals enables it to deploy various growth levers to drive revenue growth. Management is confident of maintaining the margins around the 27% level. FY14 fresher hiring of 25,000 (Infosys 6,000) shows strong visibility TCS continuous to be our top pick and expect the P/E to sustain over Infosys. TCS also announced Mr. Rajesh Gopinthan as CFO, post the retirement of Mr. Mahalingam. Retain ADD with a revised TP of Rs. 1,375. Broad based revenue growth: TCS’ 4.6% qoq US$ growth consisted of volume growth of 5% with geography mix being the key headwind. Manufacturing (up 8.5% qoq), and RIM (up 12.4% qoq) were the strongest performers. Every single vertical / geography / service line have reported sequential growth. TCS continues to maintain strong hiring with Net Adds of 10,531. Management noted that deal signings continue to be strong with deal wins across geographies and verticals and also early signs of discretionary spend based projects Margins lower than expectation: EBIT margins declined 70 bps qoq on the higher revenues from emerging markets (QoQ growth of 8.2% vs 3.6% for developed markets. Another key reason for soft margins were a number of transformation project undertaken by TCS. Management indicated that they stay committed to the EBIT margin levels of 27% and would manage margins even in the case of forex appreciation. Retain ADD: Our estimates broadly remain same. We downgraded TCS from BUY to ADD on 5-Jun and believe absolute upsides are limited. However, TCS continues to be our preferred large-cap IT stock over Infosys and Wipro given its strong execution and diversified revenues. We believe the expanding P/E gap with Infosys is warranted and would sustain in the medium-term. Retain ADD with price target of Rs. 1,375.

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