>Tata Consultancy Services

Tata Consultancy Services (TCS) reported Q1FY13 results touch-ahead of PLe/ consensus expectations. The management indicated no worrying signs in clients’ spending behaviour. Moreover, they indicated that some of the delays that they had witnessed at the beginning of the last quarter are allaying away. We see uncertain demand environment and weak pricing environment to restrict consensus estimate upgrade. We retain our ‘Accumulate’ rating, with a revise target price of Rs1,290.



􀂄 Beaten expectation in a challenging environment: TCS reported Q1FY13 results touch ahead of PLe/consensus expectation. Revenue grew by 12.1% QoQ to Rs148.69bn (PLe: Rs145.85bn; Cons: Rs146.41bn) and 3% QoQ in USD terms, led by better-than-expected volume growth of 5.3% QoQ (PLe: 3.7%). EBIT margins eroded by 20bps (PLe: +30bps, Cons: -20bps) to 27.5%. EPS grew by 11.7% QoQ to Rs16.76 (PLe: Rs16.53, Cons: Rs16.01).


􀂄 Is pricing at risk? The pricing in Q1FY13 declined by 1.06% QoQ in constant currency. However, the management sees no pressure on pricing. Nevertheless, as the demand environment gets challenging, the competitive landscape will give opportunities to client to take advantage and seek pricing cut. Moreover, peers would use pricing as a strategy to regain market share. We see pricing to remain under pressure in the near term.


􀂄 Growth ‐ broad‐based or select few? According to the management, the deal pipeline is more broad-based and the growth has come across the vertical. The strong growth in BFSI and telecom is led by one client ramp-up in each vertical. We see the growth getting scarce as the demand environment gets challenging. However, already pocketed deals for TCS gives better visibility of revenue compared to peers. The management is confident of achieving higher end of NASSCOM guidance in the constant currency terms.


􀂄 Valuation & Recommendation: The current price factors in strong performance by TCS. We tweak our model; hence revise our target price to Rs1,290 (from Rs1,270), 17x FY14E earnings estimate. We value TCS on FY14 due to better revenue visibility compared to Infosys, which we value on FY13 estimates.


To read report in detail: TCS


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