Saturday, April 20, 2013

Brokerages view on TCS post good Q4 results

MUMBAI: Brokerages have maintained their ratings on Tata Consultancy Services after its in-line fourth quarter results. Analysts are bullish on the stock following the positive growth outlook by the company management.

The company's net profit for quarter ended March 2013 increased to Rs.3,596.9 crore, up 1.27 per cent, as compared to Rs.3551.8 crore, Quarter-on-Quarter (Q-o-Q). Revenues in rupee terms increased to Rs.16,430 crore, up 2.24 per cent, from Rs.16,069.8 crore, Q-o-Q.Revenues in dollar terms rose to $ 3040 million, up 3.12 per cent, from $ 2948 million, Q-o-Q. EBIT margin slipped to 26.5 per cent vs 27.26 per cent, Q-o-Q.

 "Our performance is likely to be better in FY14 compared with this year," said TCS Chief Executive Officer N Chandrasekaran. "The order book going into FY14 is quite good. We are pursuing more number of large deals both in terms of number and size than last year."

The company, which does not provide guidance, said it would grow above industry growth estimates.

TCS said deals in mobility, social, big data and cloud were growing faster than the company average. "This is a very important area where we've made significant investments.

TCS indicated a profit margin level for FY14, with CFO Rajesh Gopinath saying, it would try to defend operating profit margins at 27 per cent.

Following are the brokerages view on the stock after decent quarterly results.

1) Barclays:

Management highlighted growth will be strong in FY14, led by earlier than expected corporate budget finalizations and a likely revival in telecom sector growth. Margins are likely to remain in the 27 per cent band in FY14E, excluding currency impact. Pricing is expected to remain stable with management indicating that pricing environment is not more aggressive than the norm.

The brokerage has changed its estimates to incorporate the Mar-13 results and new currency forecasts. It raised FY14/15 EPS by 0.9 per cent/4.5 per cent.

"We change our 12-month price target to Rs1,475, based on the back of increase in EPS estimates and by rolling forward our target price to compensate for passage of time," the report said.

2) HSBC:

The brokerage expects modest earnings upgrades in TCS from the first quarter of FY14 on the back of management's positive growth outlook. It remains positive on the stock with a target price of Rs 1,785.

"Management remained positive on the demand environment and continues to expect better growth in FY14 compared to FY13 and NASSCOM guidance," the report said.

TCS expects the demand environment to improve through the year across most of the verticals. Particularly in BFSI (Baking and Financial services), the growth in FY14 is likely to improve as banks increase their spend on compliance and regulatory requirements and increase in offshoring and other revenue growth areas.

According to the brokerage, the company's 70bp decline in margins during the quarter was led by a negative impact of 60bp from adverse currency and one-time US settlement cost of 100bp, partially offset by productivity improvements.

The brokerage remains positive on TCS and has modestly lowered its FY14 earnings estimate by 2 per cent to factor in higher tax rate, offset by better growth outlook.

3) UBS:

The brokerage remains convinced that its forecast of 20 per cent revenue growth in FY14 is entirely achievable after TCS ended FY13 with constant currency revenue growth of 16.2 per cent vs initial outlook of 14-15 per cent.

TCS' commentary on large segments like banking, financial services (40% of India's IT exports) also reassures the demand environment in 2013 is improving, the report says.

UBS is of the view that the valuation of TCS is well deserved and is likely to sustain.

"Given the superior revenue performance and margin execution, we think that TCS' valuation premium to the sector is likely to sustain. We see little risk to consensus

earnings estimates even if one were to assume a higher margin impact in FY14 as strong volumes are likely to compensate for the same," the report added.

The brokerage has a price target of Rs 1,850 on the stock.

4) Citigroup:

The brokerage has a neutral rating on the stock despite good set of numbers for the quarter ended March 2013. The stock will require strong execution and earnings upgrades for the stock to perform, it says.

According to the report, over the past few years, the company has benefitted significantly from the return of spends in the BFSI segment; however, growth could slow down given the higher scale. While TCS continues to execute well, expectations are high and valuation is at significant premium to peers in the sector.

"We estimate TCS' earnings will grow at a ~12 per cent CAGR over FY13-15E, and believe the stock should trade closer to the higher end of its historical five-year trading range of 7-24x 12- month forward earnings. We believe PE remains the most appropriate valuation measure, given TCS' past profitability and future earnings visibility," the report added.

Courtesy: The Economic Times