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MOSL: TCS - Seasonality and India headwinds in 4Q too - but FY15 growth to better FY14




Motilal Oswal Securities Ltd.


19 Mar 2014





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TCS: Seasonality and India headwinds in 4Q too; but FY15 growth to better FY14, only India lagging currently (TCS IN, Mkt Cap USD68b, CMP INR2123, TP INR2350, 11% Upside, Neutral) As in 3Q, revenue growth in 4QFY14 should remain soft on the back of same headwinds seasonality and India geography FY15 revenue growth should be better than FY14, backed by improvement in discretionary spending Reinvestments of operating profits will be calibrated in line with currency movements. If currency stabilizes, investments could be upped Seasonal 4Q weakness and India headwinds to revenue growth TCS 4QFY14 revenue growth will be impacted by the seasonal slowness of budgeting quarter. Additionally, 4Q which was seasonally strong quarter for India geography, is expected to see decline in India revenues this quarter. As a result, overall constant currency revenue growth in 4Q could even be lesser than that in 3Q (when revenues grew 2.1% CC). Margins are expected to remain stable, with ~40bp headwinds from reinvestments of currency benefits. We model 2.4% QoQ USD revenue growth in 4Q and flat EBIT margin at 29.7%. Maintains outlook of better revenue growth in FY15 TCS maintained its outlook of better growth in FY15 v/s FY14, implying yet another year of industry leading growth. It also brushed aside any concerns on the Retail vertical, as highlighted by Infosys last week owing to weak profitability of the clients, inclement weather conditions in the US and some ramp downs. India is the only notably sluggish segment currently. Discretionary spending to be better in FY15; Europe traction intact Discretionary spending is expected to better FY14, as conversations with clients convert to pipeline in a couple of months. Growth is expected to be broad-based across services. Smaller verticals are expected to outgrow larger ones like BFSI and Retail due to low base effect and not any underlying vertical-specific demand fundamentals. Europe should continue to grow strong in FY15. Estimates unchanged, maintain Neutral Our estimates for FY15E/FY16E are unchanged. We expect TCS to grow its USD revenues at a CAGR of 17% over FY14-16E and EPS at CAGR of 22% during this period. Weakness in India geography could clip outperformance to peers over the near term. Also, as currency stabilizes within a band, reinvestments should pick up, and margins could drop closer to the 27% levels, in line with the companys aspiration. Our target price of INR2,350 discounts FY16E EPS by 18x, implying 11% upside. Maintain Neutral.

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