Emkay -22.12.10- Tata Consultancy Services

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# Co remains confidence of sustaining a 20%+ revenue CAGR
over the next 3 years supported by demand momentum
# Expect an encore of strong performance in Dec’10 quarter.
Estimate a 7% QoQ US$ rev growth and build in nearly flat
margins despite headwinds from currency and strong hiring
# Upping FY12/13E EPS by ~7.5/11% to Rs 51.1/60.2 as we
build in a 24%/19% revenue growth (V/s 22%/17% earlier) and
reset in currency assumptions to Rs 45/$ ( V/s Rs 44/$)
# Valuations at ~23x/19x FY12/13E EPS appear stiff, however
we back further stock price upsides backed by earnings
upgrades. Retain ACCUM, with a revised TP of Rs 1,250

Remains positive on volume momentum heading into CY11

TCS remains extremely confident of volume momentum sustaining into CY11 driven by
broader basing of spending to other verticals apart from fin services. Co. noted that it
remained confident of a 20%+ revenue CAGR over the next 3 years driven by (1)
resumption of the offshore IT shift after the downturn in late CY08/early CY09, (2) a
large renewal cycle with mega deals getting broken into smaller sizes of US$ 200-300
mn, sweet spot for Indian techs and (3) pick up in spends in Telecom and Manufacturing
verticals.TCS mgmt indicated that within fin svcs, it was seeing clients spending focused
on regulatory and compliance related areas as M&A related spending was tapering off
while expects growth to pick up verticals like Manufacturing and Telecom ahead as
clients look to improve cost efficiencies. TCS mgmt mentioned that it has already given
campus offers of ~35k for FY12 (V/s ~24k in FY11). TCS continues to expect an
uptick in pricing over the next 2-3 quarters.

Dec’10 qtr could also turn out to be an encore of the strong performance
in the past few quarters

Interactions with co mgmt indicate that although Dec’10 qtr may not be as bumper as ~12% QoQ revenue growth performance of Sep’10 qtr (double digit gwth for the 1st time in 8 qtrs) impacted by lower number of working days as well as planned shutdowns in select Telecom OEM’s/ Hi Tech and Manufacturing clients, it would be still turn out to be a strong show. We pencil in a 7% QoQ rev growth for Dec’10 qtr with nearly flat EBITDA mgns (down by ~20 bps QoQ to 29.8%) despite headwinds from strong hiring (co indicates that it has hired ~8k-9k freshers during the qtr) and currency appreciation.

Upping FY12/13E earnings by ~7.5/11% to Rs 51.1/60.2 respectively, raise March’12 TP to Rs 1,250

We now estimate a 24%/19.2% US$ rev growth for FY12/13 (V/s 22%/17% earlier, after tweaking up our FY11E rev marginally), reset our US$/INR assumptions to Rs 45/$(V/s Rs 44/$) driving a 7.5/11% increase in our FY12/13E earnings to Rs 51.2 and Rs 60.2. A 7-8% up move in the stock price over the past week already factors in a strong Dec’10 showing somewhat however we note that TCS has continued to surprise the street over the past few qtrs which has driven TCS’s strong out performance V/s peers in the last 12 months. Although valuations appear stiff at ~23xFY12E earnings appear stiff, we would back further stock upsides driven by earnings upgrades. We retain ACCUMULATE with a revised March’12 price target of Rs 1,250 (V/s Rs 1,075 earlier).