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TCS Analyst Meet Update

Contributed by Angel Broking

Tata Consultancy Services (TCS) hosted an analyst briefing with Mr. S. Mahalingam, CFO and Executive Director and Mr. Kedar Shirali, Head of Investor Relations. Following are the key takeaways: Stable demand environment with no change in outlook: TCS is on track to meet its full-year plan shaped in April 2012 of growing faster than Nasscom’s estimate of 11-14% (on constant currency basis). The company does not see any major project cancellations or change in customers' decision making process or budgets. The deal pipeline of the company continues to remain healthy. The overall pricing in the market is stable.

2QFY2013 volume growth likely to be lower than 1QFY2013: We believe TCS is likely to deliver a 4.5-4.8% qoq volume growth in 2QFY2013 as compared to 5.3% in 1QFY2013 as 1QFY2013 included ramp up from Friends’ Life acquisition deal. Unfavorable cross currency movement is expected to negatively impact USD revenue growth; we believe revenue growth could be in the range of 4-4.5% qoq.

Operating margin expected to slip marginally: TCS’ management expects a slight dip in margin during 2QFY2013 due to following reasons: 1) fresher joining, 2) ramp up of projects from India and APAC geography which are of lower margins and 3) marginal shift to onsite for new deal starts. All these are likely to absorb gains coming in from INR depreciation against the USD. TCS has decided to invest the benefits of INR depreciation in pursuing lower-margin strategic deals that may not have met its margin threshold earlier.

Other key points: The management appeared comfortable with the company's revenue growth trajectory. TCS sees growth in all major geographies, service lines and verticals (except telecom). The banking, financial services and insurance (BFSI) segment is expected to grow at a slower rate than the company’s overall growth rate while revenues from retail, manufacturing and hi-tech industries are expected to grow faster. On-boarding of its current batch of freshers is on track, but the company is yet to take a decision on its hiring target for next year. TCS does not expect to incur any hedging loss in 2QFY2013. The current outstanding hedge book of TCS stands at ~US$1.8-2bn.

Outlook and valuation: The management commentary sounded promising and hardly reflected any impact from a daunting macro environment. We expect TCS to again outperform its peers in 2QFY2013 in terms of growth. TCS has executed well over the past many quarters but valuations are running high at 19.9x and 18.5x its FY2013E and FY2014E EPS of `67.3 and `72.4, respectively. We continue to remain positive on the stock but given the current valuations, we do not see any meaningful absolute upside from the current levels. We maintain our Neutral view on the stock.