Analyst Research Report Snapshot

Title:

Tata Consultancy Services Ltd. – Q2FY14 Result Update - "HOLD"

Price:

$69.00

Provider:

Kisan Ratilal Choksey Shares and Securities Private Limited

Date:

30 Oct 2013

Pages:

7

Type:

AcrobatPDF

Companies referenced:

TCS.NS

Available for Immediate Download
Summary:

Tata Consultancy Services Ltd. – Q2FY14 Result Update CMP: Rs 2,143 Target Price: Rs 2,226 Recommendation: HOLD “Growth momentum continues to be strong; however valuation seems to be highly demanding” Key Result Highlights • Revenue growth of 4.9% QoQ in constant currency terms (excluding Alti acquisition) and improvement in EBITDA margin by 300 bps was more or less in with our expectation. • Growth continues to be broad based; even trouble vertical such as Telecom registered double digit growth and is expected to maintain momentum, going forward, supported by 2 large deal wins in Q2 FY14. • The management continues to be positive about demand environment. Moreover they expect spend on discretionary projects will improve, going forward, especially in areas which improves clients’ front end capabilities and SMAC. Hence, we believe, growth rate for Indian IT industry and leading players such as TCS will improve in FY15E as compared to FY14E on back of improvement in global macro environment. • TCS’s consensus earnings estimates already reflects high teens revenue growth in USD terms and 30% plus EBITDA margin level in FY14E and FY15E. Moreover, reverse DCF analysis indicates that current stock price factors in revenue CAGR of 15% (in USD terms) and EBITDA margin of 31% over the period of next 10 years (for detailed working please refer Annexure 1). Hence, we believe valuation seems to be highly demanding and taking the same into account we maintain our “HOLD” recommend on the stock. H2 FY14 will register lower sequential revenue growth compared to H1 FY14 Seasonal factors such as furlough and lower working days in Q3 FY14E and clients budgeting cycle in Q4 FY14E will adversely impact revenue growth sequentially in H2 FY14E as compared to 1H FY14. However, on YoY basis we still expect H2 FY14E to register high teen growth supported by improvement in demand environment leading to pick up in discretionary spend. Medium term EBIT margin target continues to be in the range of 26% to 30% Inspite increase EBIT margin to 30.2% in Q2 FY14 supported by sharp depreciation in INR against the major global currencies over last one quarter; the management has maintained its medium term EBIT margin in the target range of 26% to 28% . The management has not elaborated its plan about utilizing benefit realized from INR weakness. Large deal signing across verticals gives confidence about sustainability of industry leading growth in 2H FY14E and FY15E The company signed 8 large deals of which 2 each are in BFSI and Telecom and one each in Hi-Tech, Utilities, Life-Science and Retail. Beside these 8 large deals the company has signed large number of small deals in Digital Services and Solutions. Valuation and view Reverse DCF analysis indicates that current stock price factors in revenue CAGR of 15% (in USD terms) and EBITDA margin of 31% over the period of next 10 years (for detailed working please refer Annexure 1). Hence, we believe valuation seems to be highly demanding and taking the same into account we maintain our “HOLD” recommend on the stock with a price target of Rs. 2,226 by assigning multiple of 19 times to its FY15E EPS of Rs. 117.2.

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