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Tata Consultancy Services Ltd.- Management Meet Update - "ACCUMULATE"




Kisan Ratilal Choksey Shares and Securities Private Limited


19 Mar 2014





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Tata Consultancy Services Ltd.- Management Meet Update CMP: Rs 2,033 Target Price: Rs 2,168 Recommendation: ACCUMULATE “Price correction unwarranted; offers good entry point” We attended the analyst meet hosted by TCS and came out with the positive view about overall demand environment in FY15E. However, the management reiterated that sustainable level of EBIT margin will be around 27%, going forward, and they will invest any extra margins over that level in business. Whereas consensus expects EBIT margin in FY15E to remain more or less at FY14E level i.e. 29%. Hence, we believe, consensus EBIT margin estimates for FY15E will be calibrated downwards in-line with the company’s target level. Ergo, we believe today’s correction in the stock price is more on account of readjustment of consensus margin estimates rather than disappointment about relatively slower growth in Q4 FY14E and believe the current stock price is good entry point in the stock. The following are key takeaways from the meet: - Outlook for FY15E looks robust: - • Revenue growth in FY15E will be modestly better than FY14E led by improvement in overall demand environment: - As per the management; overall demand environment continues to remain healthy and they expect discretionary spend to pick-up especially in US. Whereas, growth in Europe will continue to be led by increase in penetration rate in Continental Europe. They are witnessing growth across industries (except telecom which continues to be volatile), service lines (including discretionary areas; however demand for core ERP implementation continues to be lackluster) and geographies (India continues to be volatile and likely to register pressure in FY15E on YoY basis). Ergo, the company expects growth rate in FY15E will be marginally higher than FY14E and H1 FY15E to be better than H2 FY15E on account of seasonality factors. • Will invest extra margin over and above target level in business: - The management reiterated that they will invest extra margins (i.e. over and above target level of 27%) which were realized primarily on account of Indian Rupee depreciation against the major global currencies in H1 FY14. In-line with their strategy they have already invested in business in Q4 FY14E leading to decline in EBIT margin by 40 bps to 50 bps on QoQ basis. Further, they expect wage hike to employees in Q1 FY15E will take-away another 200 bps plus from margins. Any remaining portion after wage hike will be utilized by the company in FY15E for further investment in expanding its geographic, vertical and service-line footprint. Seasonality and pressure in Indian business will lead to slower growth in Q4 FY14E: -Revenue growth in Q4 FY14E is likely to be marginally lower than Q3 FY14 (i.e. 2.1% QoQ in constant currency terms) led by seasonality factors (new budget cycle for clients) and pressure in Indian business on account of general election. Valuation and view Taking into account that the company will continue to register industry leading growth rate, going forward, we believe the premium valuation assigned to the company is justified. We maintain our “ACCUMULATE” recommendation on the stock with target price of Rs.2,168 by assigning multiple of 18 times to its FY16E EPS of Rs.120.5.

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