>TATA CONSULTANCY SERVICES (ICICI SECURITIES)

Spectacular show in difficult times

Tata Consultancy Services (TCS) Q1FY10 results positively surprised the Street and I-Sec, despite our estimates being at the higher end of the consensus (we rated TCS as top results pick in Q1FY10 preview note). With clear outperformance, Q1FY10 annualised EPS is now Rs31, higher than I-Sec and Street estimates for FY11 (before results). Considering management confidence on improved visibility in BFS going forward, its expectations of flat organic growth in FY10 (still implying +3% CQoQ in Q2-Q4FY10, though we estimate 1% decline in FY10) and 8-13% CQoQ decline in the past three quarters in troubled verticals of Manufacturing, Telecom & Hi-Tech, the company’s growth is unlikely to worsen significantly. We upgrade TCS to BUY from Hold.

■ We raise estimates and revise target price to Rs525. Post the overall stellar performance in Q1FY10 and extension of STPI tax exemption to March ’11, we raise FY10E & FY11E dollar revenues 3% each and EPS estimates 14% and 17% respectively. We now expect 8% EBITDA CAGR versus 3% for Infosys in FY09- 11E. With faster recovery in BFSI, we believe risk to revenue growth has reduced for TCS. Considering all these, we reduce target P/E discount to Infosys (currently at 17x FY11E EPS, which was raised post Q1FY10 results) to 5-10% from 15%. Hence, we upgrade TCS to BUY with revised price target of Rs525 from Rs385.

■ Outstanding Q1FY10 results versus peers (Table 2) with consolidated dollar revenue growth of 3.54% versus our expectations of flat growth. Though much of the growth is driven by domestic revenues, international business also grew 2.3% (growth in constant currency likely to be lower ~2%). With 190bps improvement in utilisation, 270bps in offshoring and 90bps in SG&A, EBITDA margin improved 100bps versus our expectations of 40bps decline. Despite higher fresher recruitment in H2FY10, we do not expect significant margin pressure considering the expected volume pick-up in H2FY10.

■ Resilience in growth across key metrics; higher deal wins in difficult times with eight large deals (five from the US) and pipeline of +20 deals versus Infosys winning six large deals in Q1FY10. BFSI showed good resilience and grew 5.9% QoQ, led by growth in top client. Q1FY10 results also indicate that TCS is increasing its wallet share in non-discretionary spend with ADM, IMS and BPO growing more than other services.

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