Buy TCS; target of Rs 2860

25 Oct

Slight revenue miss; margins below our expectation: Revenues at US$ 3.9bn rose 6.4% QoQ (RCMLe: 6.9%) led by a 6.1% growth in volumes. International revenues grew by 7.4% QoQ CC which includes 2.8%QoQ growth due to JV consolidation in Japan. EBIT margins grew 50bps QoQ to 26.8% (RCMLe: 28%) led by reversal of depreciation charge, operating efficiencies and rupee depreciation. PAT stood at Rs 53.2bn (+13% QoQ) lower than our estimates due to a lower treasury income.

Revenue growth largely broad-based: Revenue growth was broad-based with the APAC/US/UK/ Continental Europe/India growing by 35%/4.7%/4.1%/3.2%/ 11% in INR terms; management expects further recovery in India region. Vertical-wise, manufacturing/BFSI/retail/energy revenues were up 26.5%/4.4%/ 5.4%/18.8% QoQ; insurance and retail vertical are expected to remain soft in near term.

Valuations and view: Execution of a strong deal pipeline remains a key for TCS as management maintains its stance on the demand environment. Further the management has guided for seasonally weak Q3. TCS has approved merger with CMC with a swap ratio of 79:100 which is a 3% discount for CMC and we believe the discount should have been higher given CMC’s lower growth and margin as compared to TCS; though this will have marginal impact on earnings. We have marginally revised our estimates and roll over to Dec’15 TP of Rs 2,860 based on 20x one year fwd. Maintain BUY.

TCS reported Q2FY15 with 6.4% QoQ US$ growth in revenues vs. RCMLe 7% driven by 6.1% volume growth. EBIT margins grew 50bpsQoQ to 26.8% (RCMLe 28%) and were lower than our estimate due to lower positive impact of operating efficiencies. TCS has approved merger with CMC with a swap ratio of 79:100 which will have a marginal financial impact for FY16E and FY17E earnings, We marginally adjust our FY15/FY16 estimates and roll over to Dec’15 TP of Rs 2,860 (from Rs 2,600). Maintain BUY,” says Religare Capital research report

Sudarshan Sukhani of told CNBC-TV18, “We opened at the high of the day and we have started drifting down which is why we keep a tight stoploss. If we keep on drifting we don’t want to stay on today at least. You could buy  TCS   or  Infosys  , either of them today. I would avoid the banks.”

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Posted by on October 25, 2014 in Uncategorized


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