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Spark Capital: TCS 1QFY14 result review - Stellar performance; Retain Add




Spark Capital Advisors(India) Private Limited


25 Jul 2013





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TCS 1QFY14 result review - Stellar performance; Retain Add TCS’s 1QFY14 US$ revenues grew 4.1% qoq, way ahead than our estimate of 3.6% aided by strong volumes of 6.1%. EBITDA margins improved marginally by 29 bps to 28.6% with currency benefits offsetting wage hikes. TCS showed holistic growth across verticals and service lines while across geographies India was the only weak segment. Management maintained its evergreen positive stance and retained that FY14E would be a better year than FY13E and also be ahead of NASSCOM’s growth guidance. TCS won 10 large transformational deals most of them in U.S. Utilisation was flat qoq and the management believes it could be scaled upto 84.5%. 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. 1,890. CC revenue growth at 4.8%: US$ revenue growth was driven by strong volumes of 6.1% qoq while realisation was down by 160 bps. Consulting led growth (17.5% qoq) while RIM and ADM grew 2.4% qoq and 3.9% qoq. Across verticals, Retail, Life sciences and Telecom led growth. India came in weak and is expected to be lumpy in the coming quarters. We continue to believe TCS’s revenue profile is highly diversified and is at the core of driving sustainable revenue growth. EBIT margins up 51 bps: EBIT margins for the quarter was at 27%, up 51 bps with rupee gains (161 bps) ,non one-off expense (US settlement) and operational efficiencies offsetting wage hikes of 172 bps.TCS continues to maintain its target margin at 27% for FY14E with reinvesting the rupee gains and operational efficiencies in driving revenue growth. FY14E better than FY13: Management’s confidence in FY14E stems from increased clarity in decision making amongst it’s clients. Growth pattern would be similar to FY13 with H1 better than H2 and expects pricing environment to be stable. Growth is expected to be led by BFS and other emerging verticals like retail, healthcare and by RIM and Consulting across service lines. 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 CMP trading at 18.8x FY15E EPS, valuations seems stretched. But given the impeccable performance and strong outlook, the safe haven commands the premium multiple. Reiterate ADD with price target of Rs. 1890 attaching 20x on FY15E EPS.

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