Tata Consultancy Services Recommendation: Buy Price target: Rs3,010 Current market price: Rs2,679 Good quarter, though misses expectation; price target revised to Rs3,010 Key points Tata Consultancy Services (TCS) reported higher than industry average revenues growth and impressive volume growth of 6.1% sequentially in Q2FY2015. However, it fell short of heightened Streets expectations due to lower than anticipated growth in the retail and insurance verticals. In USD terms, the consolidated revenues grew by 6.4% to $3,929 million which were affected by cross-currency movement since the revenue growth stood at 7.4% QoQ on a constant-currency basis. Excluding the consolidation of revenues from Mitsubishi JV, the comparable revenue growth stood at 4.6% in USD terms. EBIT margins 55BPS to 26.8%, largely led by an absence of depreciation impact, though consolidation on JV had a 40BPS negative impact on margins. The net income was higher by 4.6% QoQ to Rs 5,288.3 crore. The management reaffirmed that FY2015 would be stronger than FY2014 including Mitsubishi JV (the revenues had grown at 16.2% YoY in FY2014), however, on an organic basis the growth could lag, owing to cross-currency headwinds and delay in ramp-up of retail and softness in Diligenta, insurance platform in the UK. During Q2FY2015 the company signed five large deals and increased hiring target to above 55,000 employees for FY2015. During the quarter, TCS has announced amalgamation of its 51% subsidiary CMC to create long-term value for the shareholders. Notwithstanding the marginal disappointment in Q2, we have largely maintained our estimates for FY2015/FY2016 and introduced FY2017 EPS estimates of Rs143.5 on this note. TCS is the undisputed market leader and would continue to benefit from the improving demand environment (and report industry-leading growth rates). Thus, we see any weakness as an opportunity to buy into TCS and are consequently rolling over our price target to Rs3,010 based on FY2017 estimates. We retain Buy rating on the stock.
Posted on: Fri, 17 Oct 2014 06:11:41 +0000
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