Tata Consultancy Services Commentary stable, Seasonality to impact quarter:: PL Research

We attended Tata Consultancy Services’ (TCS’) “Sell Side Analysts’ Meet” on
December 17, 2012. The management retained its stance on a stable outlook for
FY13. However, Q3FY13 performance is likely to be impacted by lower number of
working days and furloughs. The company didn’t share median consensus
expectation for the quarter. We tweak our model for higher tax rate, hence revise
our target price to Rs1,400 (from Rs1,450).

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􀂄 ~3% negative impact due to lower working days and furloughs: According to
the management, the quarter will be impacted by lower working days (1 day)
and furloughs (~1.5 days). 1) Q3 generally witnesses furloughs from Hi-tech,
manufacturing and telecom clients. 2) BFSI also witnesses furloughs in the
quarter. However, the furloughs are not an indication of any budget cuts. 3)
Lower growth in Europe due to weakness in telecom vertical 4) North America
likely to deliver positive volume growth despite usual headwinds including
Sandy 5) In terms of service line, the growth is likely to be evenly poised. 6)
There is no pricing pressure, but didn’t rule out volume discount.
􀂄 Gross addition likely to be lower, but fresher addition strong: The company is
will have weak laterals additions but strong fresher additions. The management
does not expect any spill-over in fresher addition to FY14. Moreover, guidance
for FY14 fresher addition of 25k is retained. Also, the supply-side constraint will
continue pushing subcontracting cost but at a slower pace.
􀂄 Margin decline to continue, but strict vigil on 27% operating margin guidance:
The management expects decline in margin due to lower working days, higher
fresher intakes and forex movement. However, they reiterated their goal of 27%
EBIT margin. The management was confident of recouping margin in Q4FY13.
Q2FY13 & Q1FY13 operating margins were 26.8% and 27.5%, respectively.
􀂄 Tax rate stable, forex loss due to premium charged for option: The hedging loss
for Q3FY13 is likely to be Rs340-350m, compared to gain of Rs130m in Q2FY13.
There will be positive asset translation impact in the quarter due to currency
movement. Tax rate for the quarter is likely to be stable.
􀂄 Valuation & Recommendation: We retain our “Accumulate” rating.