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Spark Capital: 2QFY14 Result reviews of TCS (Retain Add, TP- Rs.2330)




Spark Capital Advisors(India) Private Limited


17 Oct 2013





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TCS - 2QFY14Result review: Strong volumes with highest operating margins, Retain Add TCS’s 2QFY14 US$ revenues growth was in line with our 5.4% qoq estimate while organic volumes grew at 6.1% qoq. Alti SA integration gave 1.2% volume growth. EBITDA margins improved 300 bps qoq to 31.6% led by currency benefits. Operating margins came at an all time high of 30.2%.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 FY13. We expect FY15E would be more robust than FY14E. Moreover, strong positive commentary on discretionary spending bodes well for the entire sector. EBIT margins are expected to hover around the earlier guided range of 26%-28% at CC and reinvestment of rupee gains would continue to be decided on quarter to quarter basis.TCS won 8 large transformational deals this quarter. Utilisation improved 70 bps qoq to 83.4% and the management believes with increasing scale, utilisation could go beyond 85%. TCS continual impeccable performance is driven by its diversity of client base, ahead of competition investments in newer services offerings / markets and laudable execution. We retain TCS as our top pick in large cap IT services with a price target of Rs.2,330. CC revenue growth at 6%: US$ revenue growth was driven by strong volumes of 7.3% qoq while realization dropped down by 130bps. Enterprise solutions led growth (8.8% qoq) while RIM,ADM and consulting grew 5.8% qoq,5.2% qoq and 0.8% qoq respectively. Across verticals, E&U, Life sciences and M&E led growth. India had a second weak quarter 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 at an all time high of 30.2%: EBIT margins came in strong led by 10.6% rupee depreciation. Looking ahead, though utilisation and shift mix could be significant operating levers, we believe the current margin upbeat would be a one time peak and expect TCS to stay in its range of 26-27% EBIT Margins. 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. We do concede that valuations are stretched, however given the improving demand environment, scope for FY15E earnings upgrade and higher portfolio weight we expect valuations to sustain. Retain ADD with TP of Rs. 2,330 arrived by 21x Sep-15 EPS.

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