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TCS (TCS) - Analyst Meet Update - Dtd. - December 17, 2012




Axis Capital Limited


17 Dec 2012





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Key takeaways from quarterly analyst meet: (1) volume growth to be lower QoQ due to Dec quarter seasonality, negative impact of Furlough’s closure, and some impact of Sandy Storm, (2) Q3 margin would also be impacted due to lower volumes and intake of fresher joinees -- in line with expectations (lateral hiring may be lower though), and (3) With focus on 27% EBIT margin intact, Q4 margin will have to be reasonably higher and may be a challenge. Q3 volume growth to be lower (2.5% QoQ) vs. Q2: Furloughs closure in Telecom, Manufacturing and Hi-Tech verticals (~24% revenue combined) and few BFSI clients has impacted volume momentum in Q3. Pricing was stable in Q3. We therefore adjust our constant currency revenue growth in Q3 to 2.5% QoQ (vs. 3% QoQ earlier) and FY13E /FY14E to 13.5% /15.0% (vs. 14% /16% earlier). Q3 USD revenue growth may be higher due to favorable cross-currency moves. We revise our target price to Rs 1,311 at 17x FY14E EPS of Rs 77 (on a higher INR of Rs 53) vs. Rs 1,332 earlier. Maintain HOLD with 9% upside. CY13E IT spends: Clarity will emerge by Jan ’13 as client feedback gets crystallized. However, TCS remains reasonably optimistic of FY14 with likely uptick in discretionary IT spend. Even if budgets are flat, TCS remains confident of higher growth due to market share gains, benefits from vendor consolidation, and its ability / depth to manage complex projects. Other highlights:  Deal pipeline steady; no change seen in decision making cycles  High focus on non-linear initiatives  FY14E fresher hiring remains intact at 25K. No deferments in FY13E fresher joinees; lateral hiring may, however, be lower  Q3 forex loss at ~Rs 325 mn (gain of Rs 930 mn in Q2) At CMP of Rs 1,206, the stock trades at 17x FY13E EPS of Rs 70 and 16x FY14E EPS of Rs 77. Regards, Priya Rohira (Executive Director – IT & Telecom) Institutional Equity Research Axis Capital Ltd. Tel.: + 91 22 4325 1104

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