Tata Consultancy Services- All is well, reiterate OP ::Macquarie Research,

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Tata Consultancy Services
All is well, reiterate OP
Event
 TCS reported solid 1Q results that comfortably beat our above-consensus
revenue growth forecast. The company delivered 7.5% QoQ growth in US$
revenue and EPS of Rs12 (6% ahead of our and Street estimates).
 Management reiterated on the call that it had not seen any signs of demand
weakness in its client interactions and that it is aware of the tough macro
environment. We reaffirm our OP rating and maintain our estimates and TP.
Impact
 Another quarter of sector leading performance. 1Q marks another quarter
of sector leading performance from the company. The results are unlikely to
produce revenue and EPS upgrades, but should allay concerns about the
demand outlook and the ability of Indian vendors to navigate the difficult
macro environment.
 Growth mix and deal pipeline inspire confidence. The robust financial
delivery this quarter was helped by double-digit revenue growth QoQ in the
telecom, hi-tech and retail vertical areas. TCS sees a good deal pipeline in the
UK and continental Europe (8 of the 15 meaningful deals in the pipeline are
from these areas). The company indicated that the share of discretionary
deals in its pipeline is healthy and higher than it was previously.
 Utilisation remains high, would watch out for future trend. We learned
from the company that it remains comfortable with high utilisation (extrainees) of 82-84%. We understand that it is one of the crucial margin levers
and that a slip in this count can surprise the Street negatively. Even so, the
company’s track record gives us confidence in its ability to strike a balance
between tight utilisation and keeping a bench to satisfy client appetite for
increased spending.  
 1Q results details: TCS reported 1Q revenues of Rs108bn (up 6.3% QoQ),
with an EBIT margin of 26.2% (down 210bp QoQ) and EPS of Rs12.16 (flat
QoQ). Lower than expected margins mitigated the beat in revenues. EPS for
the quarter were 6% higher following a Rs900m swing in Other income due to
FX and a higher treasury yield. (Please see detailed results table on page 3.)
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,360.00 based on a DCF methodology.
 Catalyst: Uptick in pricing and favourable macro environment.
Action and recommendation
 TCS is our preferred large-cap pick in the sector. We recognise that increased
investor expectations have left little cushion for the stock performance. We note a
potential miss of Street estimates in coming quarters can pressure the stock.
Even so, we think TCS management has done a commendable job over the past
two years, and we think the risk reward remains in favour of TCS