TCS: In-line 1Q might not be enough:: Nomura

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In-line 1Q might not be enough
Cautious on limited valuation
upside and already high street
expectations


1Q FY12: 6% revenue growth and 180bps margin decline likely
We expect TCS to report USD revenue growth of 6% q-q in 1Q FY12.
EBTIDA margins are likely to decline by 180bps q-q on account of wage
hikes. Management commentary on discretionary demand and pricing will
be key things to watch for as we sense some moderation in the company’s
pricing commentary over the past few quarters.
Action/Valuation: Upside limited from here, maintain NEUTRAL
We remain cautious on TCS in view of limited valuation scope and
stretched operating levers. With street expectations already running high
(we are 5% below consensus earnings estimates), we believe only
material outperformance relative to our results expectations would move
the stock higher. The stock is trading at a P/E of 20.1x for FY13F, a
premium of ~15% to Infosys, on our estimates. We expect valuations to
equalise as the growth outperformance decreases in FY12F and Infosys
posts better earnings growth compared with TCS (20% vs 16% over
FY11-13F, on our estimates). Among tier-1 stocks, we prefer Infosys and
HCL Tech.
Catalyst: Higher-than-anticipated growth in FY12F
Shift in revenue growth trajectory from 25% to 30% levels in FY12F could
lead to upsides. Moderation in utilisation and elevated lateral hiring remain
key risks. Results in line with our expectations might not be sufficient to
move the stock up from current levels.