Tata Consultancy Services- Good performance met heightened expectation:: Prabhudas Lilladher

Tata Consultancy Services (TCS) reported Q2FY13 results in line with PLe/consensus
expectation. Revenue was touch ahead, whereas margin was softer than expectation.
The management continues to remain upbeat on the clients’ behaviour and no delay in
discretionary spend. We retain our ‘Accumulate’ rating, with a revised target price of
Rs1,450 (from Rs1,360).

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􀂄 In‐line operational performance: TCS reported Q2FY13 results in-line with
PLe/consensus expectation. Revenue grew by 5.1% QoQ to Rs156.21bn (PLe:
Rs156.33bn; Cons: Rs146.41bn) and 4.6% QoQ in USD terms, led by better-thanexpected
volume growth of 5% QoQ (PLe: 4.5%). EBIT margins eroded by 75bps
(PLe: -40bps, Cons: -20bps) to 26.8%. EPS grew by 7.1% QoQ to Rs17.95 (PLe:
Rs16.90, Cons: Rs16.99).
􀂄 Fresher hiring – Does it indicate growth moderation ahead? TCS has guided for
fresher hiring of ~25k for FY14. The hiring number is softer compared to FY13
(~35k) and FY12 (~24k). According to the management, the fresher hiring number
is not an indication of weakness in demand. The company is looking to hire onsite
and at other delivery centres (like Latin America) as well. The management was
confident of hiring from off campus. However, we see moderation in hiring as an
early indication of moderated growth expectation for TCS.
􀂄 Margin levers stretched: Operating margin of TCS has eased off by ~250bps over
the last three quarters despite ~9% currency depreciation. We continue to see
margin headwinds for the company as fresher come on board, project starts to
ramp-up (increase in onsite) and there is an increase in subcontracting costs. The
management indicated that depreciated currency has encouraged them to bid for
few deals. We expect appreciating currency to slowdown bid/win rate and low
margin project ramp-ups to erode the margin if currency appreciates.
􀂄 Valuation & Recommendation: The current price factors in strong performance
by TCS. We see revenue momentum to decelerate and margin to cool-off in
H2FY13. We tweak our model; hence, revise our target price to Rs1,450 (from
Rs1,360), 18x FY14E earnings estimate.