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Tata Consultancy Services (TCS) - Qtr. Update - Dated - July 18, 2013




Axis Capital Limited


19 Jul 2013





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TCS raised investor confidence further by delivering another quarter of superlative performance – higher than expected volume growth along with stable margin, high utilization, low attrition, and 10 large deal wins to top it all. We believe such consistent and quality growth makes a strong case for rich valuation to sustain. Key demand and supply metrics continue to improve…Mining of large clients (>USD 50 mn revenue); Growth across verticals with uptick in discretionary spend; Highest utilization (~83%), lowest attrition (10%). …promising a sustainable EBIT margin with an upward bias, given operating levers like increase in offshore revenue share and productivity gains from non-linear initiatives.  In Q1, EBIT margin improved 50 bps (vs. our expectation of ~100 bps decline)  Promotions and ALTI acquisition will be absorbed in Q2, which we believe will be negated by better volume growth and fresher intake  Management confident of sustainable 27% EBIT margin Raise estimates, target PE We raise our EPS estimates for FY14E/ FY15E by 7%/ 5% to Rs 88/ Rs 101 respectively to factor in 100 bps increase in USD revenue growth and 50 bps increase in EBIT margin to ~26.5%. We raise our target P/E to 19x (vs. 18x earlier) given strong visibility, continuous improvement in key metrics, and higher EPS CAGR. Maintain BUY with revised target price of Rs 1,918 (Rs 1,748 earlier), which implies an upside of 16% from CMP. Our estimates are based on INR assumption of Rs 60/ Rs 62 for FY14E/ FY15E respectively. Key risk for the sector: US Immigration Bill getting passed. At CMP of Rs 1,660, the stock trades at 19x FY14E EPS of Rs 88 and 16x FY15E EPS of Rs 101. 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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