TCS 1QF13 Result Review I TP – Rs 1,250 I Rating: ADD
Decent performance in a rather tough environment
TCS reported revenues of US$2,728mn with a 3.0% QoQ growth (cc 4.0% QoQ), above SSLe of ~US$2,715mn. Consolidated volumes grew 5.3% QoQ, while international volumes grew 5.9% QoQ. In rupee terms, revenues grew 12.1% QoQ. EBIT margins declined only by 20bps QoQ to 27.5% as weaker rupee negated the impact of wage hikes (8% offshore, 2-4% onsite), lower rate productivity (~1% decline) and upfront visa costs. Net income grew 11.4% QoQ to Rs32,806mn, in line with SSLe of Rs32,769mn.
Key markets of North America and UK lead solid quarter: Growth was led by North America and UK which grew 2.8% and 9.7% QoQ, respectively. India contracted 1.0% QoQ. In verticals, BFSI, Retail & Distribution and Telecom registered strong growth rates of 5.0%, 8.8% and 6.1% QoQ, respectively, whereas Energy & Utilities and Others de-grew 2.4% and 22.7% QoQ, respectively. From the perspective of service lines, Enterprise Solutions and BPO performed well with growth of 5.8% and 16.5% QoQ, respectively; a full quarter’s incremental contribution from the Friend’s Life contributing to BPO, BFSI and UK numbers. On the other hand, Asset Leveraged Solutions and Business Intelligence de-grew 26.0% and 4.3% QoQ, respectively.
Management commentary remains upbeat: The management remained fairly confident about growth going forward, on the back of deal pipeline and ramp-ups of deal wins in the past. TCS continues to maintain that it will grow ahead of NASSCOM’s industry guidance of 11-14% for F13. It indicated that it has not seen deterioration in visibility and does not expect a back-ended pattern of growth through F13. It is also witnessing an easing on spends in discretionary projects and progress on ramp-ups as planned.
Healthy deal wins and client additions: The company added 29 clients in the quarter and signed 8 large deals during the quarter. Deals were spread across verticals (BFSI 3, Retail 2, Pharma 1, Media 1, Telecom 1) and geographies (US 4, UK 1, Continental Europe 1, Asia Pacific 1, Middle East 1).
Valuation: We are revising our EPS estimates for F13e/F14e by 4.4/0.0% to Rs68.7/73.6, owing to a) 1QF13 results and b) weaker Rupee assumptions. Considering macroeconomic challenges and rich valuations, we see limited upside in the near-term. The stock trades at 18.0x F13e earnings, ~30% premium to Infosys. We maintain an ADD recommendation with a target price of Rs1,250 at 17x F14e earnings.
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