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Spark Capital - TCS: Inline performance, Retain Top Pick




Spark Capital Advisors(India) Private Limited


17 Apr 2013





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Inline performance, Retain Top Pick TCS’s 3QFY13 US$ revenues grew 3.0% qoq and EBITDA margins increased 40bps qoq to 22.6%. Management oozed with confident in FY14E being better than FY13E and also be ahead of NASSCOM’s growth guidance. TCS announced a wage hike of 7% for offshore, 2-5% for Onsite and 4% other markets, indicating high confidence in sustaining margins at targeted level of 27%. TCS magical performance is driven by its diversity of client base, ahead of competition investments in newer services offerings / markets and robust delivery. We retain TCS as our top pick in large cap IT services with a price target of Rs. 1,610. India drives revenue growth: India business accounted ~40% of incremental revenues achieved during the quarter with all other geographies registering flat to positive growth. In service lines RIM continues to lead growth with 6.7% growth. Except for Transportation vertical, all other verticals grew sequentially. We continue to believe TCS’s revenue profile is highly diversified and is at the core of driving sustainable revenue growth. Margins decline due to one-off: EBIT margins for the quarter was at 26.5%, a decline of 73 bps with one-off expense (US settlement) alone accounting for 98bps. TCS maintained its target margin at 27% for FY14E too, with multiple levers still available. FY14E better than FY13: Management’s confidence in FY14E stems from increased clarity in decision making amongst it clients. Growth pattern would be similar to FY13and expects pricing environment to be stable. Growth would be led by RIM, BPO with drag experienced in FY13 from low growth in BFS and Telecom waning away. TCS is targeting headcount addition of 45,000 in FY14 with 25,000 offers already made to campus graduates. TCS had a net addition of 38,000 employees in FY13. Further announcement of wage hike is a positive and would enable TCS to retain and attract talent. Retain Top pick: We remain positive on TCS on the back of stellar performance over the last three years, superior return metrics and higher predictability. At 1,465 TCS trades at 18.5x FY14E higher than Cognizant also. We believe the premium multiple if justified given industry leading growth, stable margins and high RoE. Our price target of Rs. 1,610 is arrived by attaching 18x FY15E EPS. Reiterate ADD and top sector pick.

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