We attended the analyst meet hosted by TCS and maintain our hold view on the stock. The following are key takeaways from the meet: -
IT spending by clients is on track and they are moving ahead with discretionary projects. The company is witnessing momentum in deal pipeline across geographies and industries except telecom segment.
Margin will be under marginal pressure in Q2 FY13E primarily due to adverse trend in INR against major global currencies and increase in onsite revenue mix.
Lack of visibility for CY13E but initial discussion with the clients give the management optimism that the next year will turn out better than CY12E in terms of increase in IT spending by clients. Moreover, they believe that revenue contribution from discretionary areas will continue to remain the same inspite improvement in demand environment.
No major change in deal flow/pipeline except management turning cautious in respect of growth prospects in telecom segment
The company has seen no cancellation of projects unlike Infosys which registered cancellation of discretionary project by European client in the previous quarter. This indicates that cancellation of projects is company and client specific issues rather than industry wide trend. Moreover, they witness strong demand from clients in Retail, Insurance, Manufacturing and Hi-tech. In concern area i.e. banking sector the company continues to register momentum in both ‘Run-the-Business’ and Discretionary projects; however they expressed concern for telecom sector. Geography-wise growth is registered across all major markets i.e. US, UK and Continental Europe and expects Latin American and APAC market to continue to outperform overall company’s growth rate.
…however expects marginal decline in EBITDA margin
The management expects EBITDA margin to be under pressure in Q2 FY13E despite visa cost which is seasonal in nature is primarily incurred in Q1 FY13. The margins will be under pressure on account of increase in onsite revenue mix and adverse trend in exchange rate i.e. INR appreciation against the major global currencies.
Lack of visibility for CY13E but initial talks gives management optimism about better growth prospects than CY12E
The company has indicated that it is too early for clients to give clear cut directions in respect of their IT plans for CY13E; however their initial discussions gives them optimism that the next calendar year will be better than CY12E in terms of IT spend by clients. Moreover, the management has indicated that inspite expectation of improvement in demand environment they expect the contribution of discretionary segment in total revenue to remain unchanged in mid-term.
Valuation and view
We continue to be optimistic about business prospects for TCS especially considering momentum in its largest segment i.e. BFSI segment. However, we believe the same is reflected in consensus expectation and valuation premium assigned to the company. Hence, we believe there is limited upside to the stock price from current level and considering the same we recommend “HOLD” on the stock with target price of Rs.1,309 by assigning multiple of 17 times to its FY14E EPS of Rs.77.
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