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TCS Analyst meet update

Contributed by Angel Broking

Tata Consultancy Services (TCS) hosted an analyst briefing with Mr. Rajesh Gopinathan, CFO and Mr. Kedar Shirali, Head of Investor Relations. Following are the key takeaways:

To meet the guidance in constant currency (CC) terms for FY2013, above Nasscom’s industry estimate: TCS is on track to meet its full-year plan shaped in April 2012. For 4QFY2013, the management indicated that USD revenue growth is expected to be similar to 3QFY2013 (3.3% qoq). Pricing is expected to remain stable and growth is expected to be driven by volumes in the quarter. We model in 3.2% qoq growth in 4QFY2013. As per our estimates, revenues in FY2013 should grow by 15.8% in CC, well above 13.8% in reported currency and above the upper end of the Nasscom’s earlier guidance of 11-14%.

Operating margin expected to slip marginally: EBIT margin too, should meet the company’s target of 27% for FY2013. We model 26.9% margin in 4QFY2013 (which implies 27.1% EBIT margin for FY2013), a decline of 25bp qoq on the back of one-time lawsuit settlement of US$29.75mn.

FY2014 to be better than FY2013: 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 and have made plans to spend on IT considering all the challenges. Healthy pipeline, broad-based deal signings and upturn in discretionary spending, all these factors have collectively lend confidence to the company’s outlook of FY2014 being a better year than FY2013. The overall pricing in the market is stable. Among geographies, US is seeing broad-based optimism. Better outlook in US is driven by some uptick in discretionary spending, where the demand is more project centric. Also, management expects that with the political environment improving, visa regime should get more benign. In Europe, while the broader economy remains weak, there is increasingly greater acceptance of the outsourcing model and nature of work is largely skewed towards traditional services.

Other key points: During 4QFY2013, if the currency remains range bound, TCS expects to see an estimated forex gain of ~Rs.75cr (vs. forex loss of Rs.73cr in 3QFY2013) which would boost the reported net profit. The company has not taken a call on wage hikes yet. It will wait till the end of the quarter before finalizing the same. Overall, demand optimism remains intact with few pockets of weakness like telecom and hi-tech. The company expects BFSI to grow in line with the company average going ahead.

Valuation: TCS has executed well over the past many quarters and has outperformed the CNX IT by ~4% YTD and currently trades at 22.3x FY2013E and 20.3x FY2014E EPS (~20% premium to Infosys). After the sharp upmove YTD, we believe that TCS valuations are rich and build in a relatively strong operational performance. Keeping that in notice, we maintain Neutral rating on the stock with target price being Rs.1,525.