TCS: Muted quarter but positive outlook :: Kotak Sec,report

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Muted quarter but positive outlook. 3QFY15 was an in-line quarter. Management’s
outlook was upbeat emanating from positive US outlook, likely increase in growth rate in
LatAm and India and increasing order book in the retail vertical. TCS stopped short of
guiding for FY2016E even as the underlying commentary was positive. The company also
assuaged concerns on impact of client captives on business. All this bodes well for FY2016E.
However, higher-than-expected cross-currency impact leads to 1-2% and 1-4% cut in
FY2015-17E revenue and EPS estimates. Retain ADD; revised TP of `2,700 (from `2,800).

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An in-line quarter; subdued yoy operating profit growth but will accelerate starting 4QFY15
TCS delivered in-line revenue growth of 2.5% in constant currency and flat in USD terms to
US$3,931 mn. Hi-tech and life sciences were the faster growing verticals. The company added
clients to the US$100 mn and US$50 mn buckets – reassuring on sustainability of growth. IMS
was the primary driver of growth from a service line standpoint. From a geographical
standpoint, all geographies grew except the UK (decline in revenues due to continued rampdown
of Diligenta business). EBIT margin increased 20 bps to 27% (down 270 bps yoy), in line
with our estimates. Yoy decline in margins is a function of acquisition of IT Frontier Corporation,
investments in new deals and possible pricing pressure. Net income of `54.4 bn grew at single
digit, 5% on yoy basis; muted growth can be explained through 270 bps decline in EBIT
margin.
Upbeat commentary on CY2015/FY2016
TCS expects CY2015/FY2016 to be a very good year. The management didn’t give any
indication of growth trajectory as compared to FY2015 but the stance is understandable
following guidance miss in October 2014. The company’s optimism is predicated on (1) better
outlook for the US with large opportunities in banking and capital markets, (2) better growth
outlook for India and LatAm business and (3) strong pipeline of deals and closures in the retail
vertical. Digital will be a powerful driver of growth across verticals, per management. TCS
doesn’t see ramp-up of captive operations of its select financial service clients impacting it.
Cut EPS estimate by 1-4% and TP to `2,700 (`2,800 earlier), ADD stays
Higher-than-expected cross-currency headwinds result in 1-2% and 1-4% cut in FY2015-17E
revenue and earnings estimates. We cut our target price to `2,700 (from `2,800), valuing the
stock at peak-cycle multiple of 20X September 2016E earnings. Several factors give us comfort on
solid growth and sustenance of peak-cycle multiple—(1) leadership across dimensions of verticals,
service offerings and geographies, (2) creation of new engines of growth through smart expansion
strategy—Alti, Japan and platforms are some examples, and (3) leadership in the next growth
engine, i.e. digital services. Appreciation of INR against USD and other major currencies is the key
risk to our call.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily16012015kl.pdf