Research report on TCS by Share Khan

investor’s eye

stock update

Tata Consultancy Services

Reco: Hold

Stock Update

Price target revised to Rs1,650, Hold maintained

CMP: Rs1,568

BSE code:

532540

NSE code:

TCS

We recently attended the pre-quarter analyst meet of Tata Consultancy Services (TCS). The company’s management maintained its broad-based optimism on the demand environment in view of an uptick in the discretionary projects (in the US region) and increased size of the deals from the European regions. We see no major change in the management’s overall commentary on the broader demand environment and margin profile (excluding the one-offs) for the upcoming quarter (Q4FY2013) and FY2014. Nevertheless, the management seems to be more comfortable with the target of achieving and outpacing the industry-level growth in FY2014 and sees FY2014 to be a better year compared with FY2013 (with a revenue growth close to 14% year on year [YoY]).

Sharekhan code:

TCS

Key takeaways from the interaction with TCS management

Company details Price target:

Rs1,650

Market cap:

Rs306,804 cr

52 week high/low: Rs1,598/1,047 NSE volume: (no. of shares)

12.6 lakh

Free float: (no. of shares)

51.0 cr

Shareholding pattern

Public & Others Foreign 4% 15% Institutions 6% Promoters 75%

Maintained optimism on demand environment, FY2014 to be better than FY2013 An improvement in the deal flows from the US region led by an uptick in the discretionary spending and increased size of the deals in the euro regions have further strengthened the management’s optimism with regard to the demand environment. Excluding the telecommunications (telecom) and hi-technology verticals, the management foresees good traction in the company’s others industry verticals. TCS expects higher penetration in the traditional IT projects in the European regions which would lead to higher outsourcing deals. On the other hand, more projects are coming into the system in the US region. Overall, the management expects FY2014 to be better than FY2013 (with a consensus growth expectation of around 14% YoY) and appears confident of outpacing the industry growth in FY2014.

Remain committed to maintaining EBIT margin at 27% The management sees little change in the overall EBIT margin profile of the company if the dollar/rupee remains close to Rs54-55. Further, if the rupee continues to depreciate, the management sees an opportunity for participating in more complicated deals with a slightly lower margin profile as the currency benefits will provide comfort on the overall margin front.

Price chart 1620 1520 1420 1320 1220 1120

Valuations Mar-13

Dec-12

Sep-12

Jun-12

Mar-12

1020

Price performance (%)

1m

3m

6m 12m

Absolute 11.3

25.5

14.7

35.4

Relative 10.1 to Sensex

23.7

2.7

15.9

Particulars

FY2012

FY2013E

FY2014E

FY2015E

Total revenue (Rs cr) EBIT margin (%) Net profit (Rs cr) EPS (Rs) EV/EBITDA (x) RoE (%) RoCE (%) P/E (x) Market cap/Sales (x) Dividend yield (%)

48,893.8 27.6 10,638.2 54.4 21.1 32.1 40.5 29.1 6.3 1.6

63,109.6 27.2 14,010.1 71.6 16.5 33.3 41.7 22.1 4.9 1.4

71,194.6 27.3 16,007.2 81.8 14.3 30.6 38.5 19.3 4.3 1.7

79,213.9 26.6 16,983.4 86.8 12.9 27.0 34.2 18.2 3.9 1.8

Sharekhan

2

March 11, 2013

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investor’s eye

stock update

Q4FY2013 revenue growth will be close to 3% QoQ, one-offs to affect margins

Rs53.6 and Rs52.5 for FY2014 and FY2015 respectively.

Given the consistency in the rupee’s depreciation vis-àvis the dollar, there may be room for further earnings upgrades for both TCS and the information technology sector as a whole. We maintain our earnings estimates.

However, given the room for further upgrades (based on the rupee’s depreciation and better execution capabilities of TCS), we are upgrading our target multiple to 19x FY2015E. Consequently our price target increases to Rs1,650. However, given the limited upside from the current levels, we maintain our Hold rating on the stock.

For Q4FY2014, the revenue growth will be closer to the Q3FY2013 level of 3.3%. The volume is expected to see some uptick after a soft 1.3% growth in the previous quarter. However, cross-currency headwinds are likely to have a negative impact after the positive impact of 70 basis points in Q3FY2013. The rupee realisation is expected to be around 50 paise lower than that in the preceding quarter (Rs54.8 in Q3FY2013). For Q4FY2014, there will be a one-off expense of $30 million to settle a sevenyear-old case in the USA filed by two former employees.

On account of this the EBIT margin will be affected.

However, excluding the same the margin is expected to remain stable quarter on quarter (QoQ). There will be a net hedging gain of around Rs75 crore against a loss of Rs73 crore in Q3FY2013.

One-year forward PE band 2500.0 28x

2000.0

24x 20x

1500.0

16x

1000.0

Valuation: In the last three months, the TCS stock (up 25%) has outperformed the broader market indices (up 1.3%) and the CNX IT Index (up 22%). At the current market price of Rs1,568, the stock trades at 19x and 18x FY2014E and FY2015E earnings. Currently, our earnings estimates for FY2014 and FY2015 stand at Rs81.8 and Rs86.8 respectively based on a dollar/rupee exchange rate of

12x 8x

500.0

Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

0.0

Sharekhan Limited,$its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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March 11, 2013

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Sharekhan

26

September 21, 2011

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