TCS

Buy TCS; target Rs 1410: Angel Broking

Angel Broking is bullish on Tata Consultancy Services (TCS) and has recommended buy rating on the stock with a target price of Rs 1410 in its December 17, 2012 research report.

AngelBroking is bullish on Tata Consultancy Services (TCS) and has recommended buy rating on the stock with a target price of Rs 1410 in its December 17, 2012 research report.

"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 and does not see any major project cancellations or change in customers' decision making process and their budgets. The deal pipeline of the company continues to remain healthy. The overall pricing in the market is stable.

3QFY2013 has traditionally been a relatively soft quarter in terms of volume growth for IT companies and this year is expected to be no different. We believe TCS is likely to deliver a 3-3.5% qoq volume growth in 3QFY2013 as compared to 4.9% in 2QFY2013 because of lower working days and furloughs seen. While sectors such as hi-tech and manufacturing verticals have furloughs, this time even banking and financial services (BFS) saw a few instances of clients taking furloughs. But revenues from BFS are expected to grow despite that. Telecom continues to face challenges. In terms of ramp-ups in deals signed and deal closures, the company is not seeing any variation than in 2QFY2013. Among services and geographies, growth is mostly expected to be broad-based; Europe may lag slightly, majorly because of sluggish telecom vertical.

TCS’ management expects a slight dip in margin during 3QFY2013 on account of lower working days and addition of freshers into the system. The company, however, maintained that it would be focused to deliver 27% EBIT margin for FY2013. If EBIT margins decline by 30-40bp qoq during 3QFY2013, then TCS would be required to post a 130-140bp qoq expansion in EBIT margin in 4QFY2013 to achieve the 27% target for full year FY2013.

The management indicated that it is in the midst of assessing clients’ plans as far as CY2013 budgets are concerned; early indicators call for reasonable optimism. The management will get a better picture on client budgets in January. As far as pricing is concerned, the company has not seen any irrational behavior in a consistent manner and expects pricing to remain stable. The company expects hedge losses of ~Rs 30-35cr, based on the hedge positions taken and the premium that it would have charged by December 2012.

The management commentary sounded promising and hardly reflected any impact from a daunting macro environment. We expect TCS to again outperform its peers in 3QFY2013 in terms of growth. TCS’ execution has been good over the past many quarters and its stock is currently trading at 17.3x and 15.8x its FY2013E and FY2014E EPS of Rs 69.7 and Rs 76.2, respectively. We continue to remain positive on the stock and maintain our Buy rating on the stock with a target price of Rs 1,410," says Angel Broking research report.