Please Share:: 
If it ain’t broke, don’t fix it; maintain BUY…
TCS’ Q2 preview briefing was a customary affair except for a few key
elements: 1) India (6.3% of Q1 revenues) would grow in Q2 despite the
base effect (grew 7.2% QoQ in Q1), 2) Japan continues to be a ¥ 60 billion
business despite lower incremental contribution in FY15E ($300-320
million) than earlier anticipated ($300-370 million). Recall, TCS’ FY15Ebetter-
than-FY14 guidance, at the start of the year, had built in a soft India
business. Further, a margin buffer exists given the ~1% depreciation in
the average rupee, in the quarter-to-date.
Recovery in India business could surprise FY15E estimates…
TCS continues to reiterate its better than FY14 growth guidance for FY15E
on an organic basis. However, contribution from Mitsubishi Japan JV is
likely to be lower than anticipated. Cross currency headwinds (2.6%
appreciation in $/€ QoQ) may impact reported dollar revenue growth by
70-80 bps QoQ while reported rupee revenue growth may see marginal
tailwinds as quarter to date average rupee has depreciated ~1% QoQ.
We expect TCS to report ~7.5% QoQ dollar revenue growth in Q2FY15E
(8.5% in rupee) including $100 million JV contribution while constant
currency (CC) revenue growth could top 8% QoQ. Excluding the JV, CC
revenues could grow ~5.5% QoQ (above 4.8% each reported in Q1FY15
and Q2FY14 ex-Alti). We now expect 19% dollar revenue growth for
FY15E (18% earlier) led by a continued recovery in India.
Margins may improve 20-25 bps QoQ on rupee tailwinds
Though TCS guided for flat margins QoQ (26.3%), we expect EBIT
margins to improve 20-25 bps QoQ primarily led by the rupee even as the
absence of wage hikes and one-time depreciation impact is offset by JV
consolidation charge. Other income could be lower by | 300 crore (| 815
crore in Q1) led by special dividend payment in Q2 and forex losses. We
expect FY15E margins to decline 140 bps YoY to 27.7%.
Verticals and geography perspective
BFS could see a modest uptick while insurance could continue to be soft.
Media, life sciences and travel growth could moderate to company
average vs. high single digits in Q1. India continues to witness traction.
However, TCS continues to wait before terming it a sustainable recovery.
Growth in Europe could be modest led by holidays and US continues to
be driven by project work while large deal momentum is not visible.
Raising target price on EPS upgrade, modest multiple expansion
We raise our estimates modestly and now expect revenue, PAT to grow
16%, 10% in FY15E and 16%, 18% in FY16E, respectively. This translates
to revenue, EPS CAGR of 16%, 14%, respectively, during FY14-16E.
Estimate revision along with modest multiple expansion (22.5x vs. 22.1x
earlier) leads to a target price revision to | 2,900 vs. | 2,700 earlier.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
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If it ain’t broke, don’t fix it; maintain BUY…
TCS’ Q2 preview briefing was a customary affair except for a few key
elements: 1) India (6.3% of Q1 revenues) would grow in Q2 despite the
base effect (grew 7.2% QoQ in Q1), 2) Japan continues to be a ¥ 60 billion
business despite lower incremental contribution in FY15E ($300-320
million) than earlier anticipated ($300-370 million). Recall, TCS’ FY15Ebetter-
than-FY14 guidance, at the start of the year, had built in a soft India
business. Further, a margin buffer exists given the ~1% depreciation in
the average rupee, in the quarter-to-date.
Recovery in India business could surprise FY15E estimates…
TCS continues to reiterate its better than FY14 growth guidance for FY15E
on an organic basis. However, contribution from Mitsubishi Japan JV is
likely to be lower than anticipated. Cross currency headwinds (2.6%
appreciation in $/€ QoQ) may impact reported dollar revenue growth by
70-80 bps QoQ while reported rupee revenue growth may see marginal
tailwinds as quarter to date average rupee has depreciated ~1% QoQ.
We expect TCS to report ~7.5% QoQ dollar revenue growth in Q2FY15E
(8.5% in rupee) including $100 million JV contribution while constant
currency (CC) revenue growth could top 8% QoQ. Excluding the JV, CC
revenues could grow ~5.5% QoQ (above 4.8% each reported in Q1FY15
and Q2FY14 ex-Alti). We now expect 19% dollar revenue growth for
FY15E (18% earlier) led by a continued recovery in India.
Margins may improve 20-25 bps QoQ on rupee tailwinds
Though TCS guided for flat margins QoQ (26.3%), we expect EBIT
margins to improve 20-25 bps QoQ primarily led by the rupee even as the
absence of wage hikes and one-time depreciation impact is offset by JV
consolidation charge. Other income could be lower by | 300 crore (| 815
crore in Q1) led by special dividend payment in Q2 and forex losses. We
expect FY15E margins to decline 140 bps YoY to 27.7%.
Verticals and geography perspective
BFS could see a modest uptick while insurance could continue to be soft.
Media, life sciences and travel growth could moderate to company
average vs. high single digits in Q1. India continues to witness traction.
However, TCS continues to wait before terming it a sustainable recovery.
Growth in Europe could be modest led by holidays and US continues to
be driven by project work while large deal momentum is not visible.
Raising target price on EPS upgrade, modest multiple expansion
We raise our estimates modestly and now expect revenue, PAT to grow
16%, 10% in FY15E and 16%, 18% in FY16E, respectively. This translates
to revenue, EPS CAGR of 16%, 14%, respectively, during FY14-16E.
Estimate revision along with modest multiple expansion (22.5x vs. 22.1x
earlier) leads to a target price revision to | 2,900 vs. | 2,700 earlier.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
LINK
http://content.icicidirect.com/mailimages/IDirect_TCS_CoUpdate_Sep14.pdf
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