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Analyst Research Report Snapshot


TCS (TCS) - Qtr. Update - Dtd. - January 14, 2013




Axis Capital Limited


15 Jan 2013





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TCS bettered our and Street estimates by reporting 50 bps QoQ rise in Q3 margin (vs. a marginal decline expected) to 27.3% led by better pricing and higher utilization. However, volume growth was lower at 1.3% QoQ (our est. 2.5%), mainly due to extended Furloughs closure (annual shutdowns). Management reiterated that FY14 will be better given continued momentum on deal closures, a strong pipeline, clarity on CY13E IT spend areas, and likely increase in discretionary spend. The company signed 7 large deals across verticals in Q3. 27% EBIT margin sustainable: Despite higher utilization rate (81.7% excluding trainees), TCS is confident of maintaining EBIT margin at ~27% given operating levers like increase in offshore revenue share, SG&A leverage, productivity gains from improving client mining, and higher contribution from Continental Europe. Q3 highlights  TCS reported revenue of USD 2,948 mn, up ~3% QoQ, which was higher than our expectation of USD 2,923 mn  INR revenue growth of 2.9% QoQ to Rs 161 bn was largely led by volumes (1.3%), and constant currency realization (1.3%)  EBIT margin improvement was largely driven by productivity (+85 bps) and offshore shift (+16 bps), partly offset by higher SG&A (-50 bps) Valuation: Our FY13E/ FY14E EPS remain largely intact at Rs 71/80 respectively. We introduce FY15 estimates and also roll forward our TP to FY15E EPS. Our revised TP stands at Rs 1,415 (16x FY15E EPS of Rs 88) vs. Rs 1,332 earlier (17x FY14E EPS), which implies limited upside of 6% from CMP of Rs 1,334. Maintain HOLD The stock trades at 17x FY14E EPS of Rs 80 and 15x FY15E EPS of Rs 88. Note: Our estimates are based on INR/USD of Rs 53 for FY14E and Rs 51.4 for FY15E INR/USD assumption Regards, Priya Rohira (Executive Director – IT & Telecom) Institutional Equity Research Axis Capital Ltd. Tel.: + 91 22 4325 1104

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