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Spark Capital : TCS 3QFY13: Steady performance continues; Retain Top large cap pick




Spark Capital Advisors(India) Private Limited


15 Jan 2013





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Steady performance continues; Retain Top large cap pick TCS reported 3QFY13 results inline with our expectations (US$ 2,948mn vs. US$ 2,936mn). US$ revenues grew 3.3% sequentially, EBITDA margins expanding 60bps and EPS growth of 1% qoq. Revenue growth was helped by strong realisation improvement of 1.3% sequentially. Growth was broad based and managements confidence in growth prospects is reflected in net headcount addition of 9,800 employees during the quarter. TCS indicated high confidence in FY14 being better than FY13 from a volume growth perspective. TCS continues it superior execution and we expect TCS to lead revenue growth in FY14E also. We retain TCS as our top pick in large cap with a price target of Rs. 1,410 with a ADD recommendation. Broad based revenue growth continues: Revenue growth comprised of volume growth of 1.25% and realisation improvement of 1.3%. Growth was across verticals with Manufacturing & BFSI posting health growth whereas Telecom declined 4.7% qoq. Amongst geographies Latin America and UK grew 9.4% and 5.8% qoq respectively. Management commented that deal wins during the quarter was good with BFSI accounting for four of seven large deals won in the quarter. Margins surprise positively: EBIT margins expanded 50bps qoq, even after furloughs, low volume growth and increased investment in SG&A. Margin expansion was aided by strong productivity and realisation improvement. TCS maintained their target EBIT margins to be around 27% and would look at reinvestment the excess in increase market reach and platform creation. Growth leadership would continue: Management commentary on demand environment is robust with expectation of FY14 volume growth to see an improvement over FY13. The confidence stems from improved discretionary spend environment, strong deal pipeline and productivity improvement being the key driver of client decision making. YTDFY13 TCS had net headcount addition of ~24,000 employees and fresher offers of 24,000 for FY14 indicates high confidence in revenue growth. We note that utilisation including trainees at 72.1% is 400bps below target range of 76-77% offering substantial cushion to drive growth Retain Top pick in large cap: We continue to prefer TCS over Infosys as TCS offers more certainty, predictability and superior revenue growth. Retain ADD with target of Rs. 1,410 vs. Rs. 1,375 earlier.

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