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Spark Capital: TCS 3QFY14 result review - Inline results and Strong growth outlook, changed from BUY to ADD with price appreciation




Spark Capital Advisors(India) Private Limited


17 Jan 2014





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Tata Consultancy Services 3QFY14 result review - Inline results and Strong growth outlook, changed from BUY to ADD with price appreciation TCS’s 3QFY14 constant currency growth came in at 2.1% qoq in line with our estimate while US$ revenues were a tad lower due to lower cross currency gains ( 60 bps vs. our est. of 120 bps). EBITDA margins declined 20 bps qoq with currency headwinds and reinvestments offsetting operational efficiencies.TCS showed holistic growth across verticals and service lines while across geographies India was the only weak segment. Commentary suggests that India business would continue to remain weak with delays in decision making. The management maintained its evergreen positive stance and retained that FY14E would be a better year than FY13 and FY15E would be more robust than FY14E. Growth would be led by revival of spending in US, increased offshoring from Continental Europe, improved discretionary spending and transformation initiatives in the digital space. 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. Utilisation improved 90 bps qoq to 83.4% ( a record high level) 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. Though, we continue to maintain our positive stance, significant price appreciation gives limited upside. Therefore, we change our rating from BUY to ADD with increased target price of Rs.2460. Operational performance: Volumes came in at 1.5% qoq while realization improved 74 bps. Enterprise solutions led growth (3.5% qoq) while RIM,ADM and consulting grew 3% qoq,0.7% qoq and 4.4% qoq respectively. Across verticals, Manufacturing, Life sciences and M&E led growth. India saw third consecutive decline 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 saw a marginal decline with currency (45 bps) and reinvestment (62 bps) offsetting operational efficiencies of 65 bps. We are modeling EBIT margins of 27.7% and 28.1% for FY15E and FY16E respectively. 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. Change from BUY to ADD with TP of Rs. 2,460 arrived by 20x Dec-15 EPS.

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