Goldman Sachs: TCS: Revenue momentum to continue; raise est. and TP

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TCS (TCS.BO): Revenue momentum to continue; raise est. and TP
What’s changed
 We raise our 12-month target price for TCS to Rs1,264 (from Rs997)
on the back of continued revenue momentum and an improved
macro outlook and tech spending environment. We retain our
Neutral rating on the stock as we believe that current valuation
offers limited upside potential

 BFSI continues to drive revenue growth: We expect TCS’ 45%
exposure to the BFSI vertical to continue to be a key competitive
advantage and revenue growth differentiator. We expect TCS to
continue to benefit from ongoing work related to regulatory changes
and M&A integration in the financial sector. We also believe that the
strong growth seen in verticals like retail, telecom and energy and
utilities in the last few quarters couldl ensure its strong operating
performance is sustained TCS going forward.

 Improved margin profile to be sustained at these levels: In the
last two years, TCS’ operating margins have risen by 370 bp and we
expect these levels to remain stable over the forecast period to
FY2013. TCS has seen the highest utilization and lowest staff
attrition rate among the large cap companies during the last two
quarters, which we believe have significantly contributed to the
improved margin profile.
 Raise revenue and earnings estimates: We revise our revenue and
EPS estimates by 0.5%-11.4% and 2.6%-14.8% over FY11E-FY13E,
respectively, to reflect the improved growth and stable margin
outlook. TCS’ revenue CAGR of 22% over FY10-FY13E is second only
to Infosys in our Indian IT services coverage.
Valuation
 We raise our Director’s Cut based 12-month target price to Rs1,264
(from Rs997), implying 11% potential upside. Our TP implies a P/E of
23.7X on FY2012E EPS of Rs53.30, a 4% premium to the large-cap
Indian IT companies.
 While we believe that the premium valuation being enjoyed by TCS
is justified given the strong volume growth in the last few quarters
and robust revenue outlook, we see limited upside from current
levels. Therefore, we maintain our Neutral rating.
Key risks
 Upside risks: INR depreciation; Downside: Lower-than-anticipated
GDP growth in developed markets, primarily US and INR
appreciation.