Recommendations » India

TCS 3QFY2013 performance highlights and results update

Contributed by Angel Broking

For 3QFY2013, TCS reported yet another set of healthy quarterly results, outperforming street as well as our expectations on the operating margin as well as the profit front. The only disappointment in the result was sluggish volume growth of 1.25% qoq. TCS closed seven large deals during 3QFY2013. The Management sounded confident of FY2014 being a better year than FY2013 as clients seem to have a better handle on the kind of projects they want to execute. TCS remains one of the defensive bets in the IT pack. We maintain our Accumulate rating on the stock.

Quarterly highlights: For 3QFY2013, TCS posted a revenue of US$2,948mn, up 3.3% qoq. Realization improvement aided USD revenues by 1.3% qoq in constant currency (CC) after three consecutive quarters of realization declines. TCS’ EBITDA and EBIT margin improved by 53bp and 50bp qoq to 29.0% and 27.3%, respectively, due to better realization, against street expectation of a qoq decline.

Outlook and valuation: Despite disappointing volume growth during the quarter, TCS’ commentary on the outlook for CY2013 remained bullish. The Management sounded confident of FY2014 being a better year than FY2013 as clients are aware of the challenging macro environment and have made plans to spend on IT considering all these challenges. A healthy pipeline, broad-based deal signings and upturn in discretionary spending - all these factors have collectively lent confidence to the company in estimating FY2014 to be a better year than FY2013. For FY2013, the Management has increased its gross hiring target by 10,000 employees to 60,000 now, which instills confidence in the deal pipeline of the company. Further, the company kept its campus hiring target of 25,000 people for FY2014 unchanged. Over FY2012-14E, we expect TCS’ revenue to post a 13.6% (USD terms) / 20.4% (INR terms) CAGR. On the EBITDA and PAT fronts, we expect the company to post a 19.3% and 20.7% CAGR over FY2012-14E, respectively. At the current market price of Rs.1,334, the stock is trading at 16.9x FY2014E EPS. We value TCS at 18.5x FY2014E EPS of Rs.79.1 with a target price of Rs.1,465 and maintain our Accumulate rating on the stock.