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Tata Consultancy Services (TCS) - Qtr. Update - Dated - April 17, 2013




Axis Capital Limited


18 Apr 2013





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TCS’ Q4 performance was largely in line with our expectations but volume growth at 4% vs. 3% estimated was a welcome surprise in a challenging environment. Management reiterated TCS would beat NASSCOM guidance of 12-14% industry growth in FY14, given continued momentum in deal closures, a strong pipeline, clarity on CY13 IT spend areas, and increase in discretionary spend. Management also indicated pricing is expected to remain stable despite rising competition and core BFSI vertical will also grow in line with company average despite macro concerns. 27% EBIT margin sustainable: Despite higher utilization rate (82% excl. trainees), TCS is confident of maintaining EBIT margin (including low-margin ALTI acquisition) at ~27% given operating levers like increase in offshore revenue share, productivity gains from non-linear initiatives, and higher contribution from Continental Europe. However, wage hikes would impact margin in Q1FY14. Our FY14E and FY15E USD revenue growth of ~15% each remains intact. However, higher tax rate due to movement of few SEZ facilities (from 100% exemption to 50%) increase our effective tax rate leading to 2-3% decline in our FY14E/ FY15E EPS. Deserves premium valuation We believe consistent outperformance, high visibility, and ability to maintain margin make a strong case for rich valuation to sustain. Maintain BUY with revised target price of Rs 1,736 (18x FY15E) vs. Rs 1,770 earlier. Our TP implies upside of 19% from CMP of Rs 1,459. At CMP of Rs 1459, the stock trades at 18x FY14E EPS of Rs 82 and 15x FY15E EPS of Rs 96 with our INR assumptions at Rs 56.5 / Rs 58.5 for FY14E / FY15E. Note: At current INR of Rs 54.2, EPS will be Rs 78 / Rs 89 for FY14E / FY15E. Regards, Priya Rohira (Executive Director – IT & Telecom) Institutional Equity Research Axis Capital Ltd. Tel.: + 91 22 4325 1104 Vishal Desai (AVP – IT) Institutional Equity Research Axis Capital Ltd. Tel.: + 91 22 4325 1119

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