Tata Consultancy Services:Growth outperformance to continue Toning down of expectations post 3Q, growth and valuation comfort provide a favourable backdrop: Nomura Research

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Tata Consultancy Services Ltd. (TCS) – Q3FY15 Result Update :: HDFC Securities

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Tata Consultancy Services Ltd. (TCS) | Q3FY15 Result Update | Missed the street expectation; Robust FY16 Outlook: Maintain HOLD | TP Rs.2,666. :: IndiaNivesh

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Tata Consultancy Services - Furloughs and Cross Currency Takes a Toll; Result Update Q3FY15 :: Edelweiss, report

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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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Outlook more encouraging than anticipated… • TCS :: ICICI Securities, report

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Positive outlook intact --TCS’ 3QFY15 results were in-line with our expectations. :: HDFC Securities

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SBI, ITC, TCS, Reliance Industries, Tata Steel - High Five stocks :: Business Line

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BUY TCS :: Kotak Securities

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Tata Consultancy Services - Furloughs, Cross Currency Impact to Singe Q3 :: Edelweiss, link

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Tata Consultancy Services (TCS) Buy Target : | 2850 :: ICICI Securities, PDF link

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Nothing changes: Will still grow faster than peers… • TCS -BUY :: ICICI Securities

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Tata Consultancy Services Ltd. (TCS)|Q2FY15 Result Update | Missed the street expectation; Risk to consensus estimates: Maintain HOLD | TP Rs.2,666:: IndiaNivesh

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TCS disappoints; stock can fall 3-5% on Friday: ET

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TATA CONSULTANCY SERVICES LTD (TCS) ACCUMULATE (Buy the stock at declines). :: Kotak Sec, PDF link

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TATA CONSULTANCY SERVICES LTD (TCS)
PRICE: RS.2636 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.2789 FY16E P/E: 20.2X
The management has maintained its outlook of beating FY14 growth
revenue rate in FY15. EBIT margins will likely be around the 27% mark.
Growth in 2Q is expected to be driven by all verticals except Insurance. The
JV with Mitsubishi is expected to start contributing in 2Q, with revenues of
about $100mn. We expect FY15 USD revenue growth, including Mitsubishi
JV, to be 17.5% (16.2% in FY14E) and FY16 growth to be 13%. EPS for FY15
and FY16 are expected to be at Rs.113 per share and Rs.130 per share. We
have been maintaining our positive view on medium term demand growth,
over the past few quarters. We accord a premium to TCS as compared to
peers. In the past several quarters, TCS has reported industry - leading
growth rates with sustained margins. We revise PT to Rs.2789 (Rs.2519),
based on FY16E estimates. The stock has risen post 1QFY15 results. Looking
at the 6% upside, we maintain ACCUMULATE (Buy the stock at declines).


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BUY TCS: ICICI Securities, PDF link

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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.


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TCS: Hold :: Business Line

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TCS: Making the right Japanese connection: JPMorgan

Making the right Japanese connection		Neutral Price: Rs2,222.90 17 Apr 2014 Price Target: Rs2,400.00 PT End Date: 31 Mar 2015

TCS has announced a key merger in Japan, which, we estimate, will boost TCS’s Japan revenues by USD~375 million in FY15. This should help TCS penetrate the notoriously difficult IT market in Japan. From this arrangement with Mitsubishi’s 100%-owned IT division (details below), we expect outsized benefits to flow to TCS over time, stemming from it being able to penetrate the marquee client base with its full services model. Offshore vendors, in general, have had very little to show for their efforts in Japan, because Japan is culturally very strong/different. It is certainly not a lack of opportunity, because at USD106 billion, i.e. 11%+ of global IT services spending, Japan is the second-largest IT services market in the world (after the US). However, Japan accounts for less than 1% of revenues for large Indian IT players. This deal should help TCS overcome this culture-based penetration deficit that characterizes the Japan market. It also provides access to local talent as Mitsubishi has about 1,600 associates in Japan. In addition, we believe the valuation for the deal is compellingly cheap for TCS. Thus, we regard this merger as a good opportunity for TCS. We note that TCS clarifies that its indication that FY15 will likely be a better year for revenue growth than FY14 excludes the revenue benefits of this transaction (USD 375 million in FY15E).

· TCS leads the industry in prising open newer/less-penetrated markets (such as Continental Europe, Latin America) and new-generation offerings (digital). This transaction is a further step in cementing its leadership, in our view. That said, we believe outsized returns from Japan will likely emerge over the medium to long term (going beyond nearer-term improved margins from greater offshoring of existing engagements and optimizing local SG&A).

· The Deal: TCS has announced the creation of a new strategic entity in Japan with the merger of TCS Japan Ltd., IT Frontier Corporation (ITF – Mitsubishi Corporation’s 100% IT services subsidiary) and Nippon TCS Solution Center Ltd. (NTSC – a JV between TCS and Mitsubishi). TCS will hold a 51% equity stake in the new entity, providing the company full operating control of the merged entity. This deal provides TCS the scale, market access (Mitsubishi has deep relationships with large Japanese corporations), talent and softer aspects (appreciation of cultural norms of operating in Japan) to penetrate the relatively difficult Japanese market. The company expects/plans to close the deal by Jun-14; hence, it will consolidate the business for three quarters in FY15. We are not consolidating the deal in our numbers/estimates for the time being, and will do so once the transaction is consummated.

· More details about the merger. The new entity had combined revenues of about USD600 mn last year including USD~104 mn from TCS Japan & NTSC and USD500 mn from ITF. The combined entity will have 2,400 employees in Japan including 1,600 employees from IT Frontier (i.e. Mitsubishi). The merged entity has clients in Manufacturing, Hitech, Financial Services and Retail verticals. Mitsubishi (alone) accounts for about USD 250 mn of total IT Frontier revenues. TCS has the option to increase its stake in the new entity.

· Consideration seems quite reasonable. TCS will have a 51% stake in the merged entity, for which the company will pay USD50 mn in cash to Mitsubishi other than letting go of a 49% stake in the erstwhile TCS Japan and NTSC. The combined/merged entity has been valued at USD300 mn. TCS Japan (along with the JV) has been valued at about USD100 mn i.e. at about 1x sales (given its higher profitability and operational metrics), while we estimate that IT Frontier (Mitsubishi’s business) has been valued at 0.4x sales (USD200 mn for USD500 mn sales). Hence, TCS will pay USD50 mn in cash and USD~50 mn by way of stake (in TCS Japan & NTSC) to Mitsubishi for a 50% stake (i.e. USD100 mn consideration) in the erstwhile ITF. Looking at potential margins and earnings trajectory boost from cross-selling and offshoring, the buy seems compellingly cheap, in our view.

· TCS’s JV with Mitsubishi provides operational comfort. In Feb-12, TCS and Mitsubishi entered into a JV to establish a near shore delivery center in Japan. The two companies have been working together for more than two years, providing operational comfort. We believe the history of collaborative operations will provide comfort to the new entity.

· TCS has a proven track record in strategic initiatives. By and large, TCS’s inorganic initiatives in the past have been fairly successful at meeting their specific, well-targeted intent (e.g. Pearl for building out a BPO platform strategy, eServe for end-to-end back-office process management in BFS, Comicrom to penetrate Latin America, buying out non-TCS stake in its foreign JVs after initial comfort with the new market(s) is established).

· Investment view: We find TCS’s valuations a tad punchy for the near term, hence our 'Neutral' rating. We think TCS is still a core holding for longer-term, strategic portfolios as compounding gains of consistent outperformance multiply over a longer time-frame. The math of compounding tends to get under-appreciated, in our view. Longer the time-frame, the greater the compounding gains.

 

Investment Thesis

TCS consistently delivers industry-leading growth with best-in-class margins. The company has unmatched full-service positioning, with a specific focus on “bread-and-butter” service lines, such as ADM, testing and infrastructure management, which constitute more than 70% of total IT Services spending. Moreover, TCS is proactive in playing in relatively less addressed and new markets/themes, such as Latin America and SMB (small and medium-sized businesses), to drive revenue growth. Notably, TCS has admirably managed both clients and employees, as revenue growth and attrition remain the best in the industry. TCS’s versatile business model is likely to help the company gain market share if industry growth is not as solid as we expect. However, valuations look a tad punchy currently, in our view.

Valuation

We retain our Neutral rating on TCS with a Mar-15 price target of Rs2,400. Our PT is based on a one-year forward P/E multiple of 19x, a 15% premium to Infosys’s target multiple of 16.5x. TCS has exhibited a better revenue growth profile than Infosys over the past several quarters; top-line growth has been accompanied by significantly better profitability, which we believe justifies the premium. Our exchange rate assumption is Rs60/US$ for the next two years (FY15 and FY16).

Risks to Rating and Price Target

Upside risks: Better pricing and volume growth relative to expectations and a faster-than-expected recovery in Europe provide upside risk to our EPS estimates and, hence, price target.

Downside risks: Weakness in the demand environment, no cyclical strength in FY15, as expected, rupee appreciation against the US$, an adverse immigration bill and an increase in supply-side pressures (higher attrition or wage increases) provide downside risk to our EPS estimates and, hence, price target.

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TCS: Hold:: Business Line

DB - Indian IT Services - Currency tailwind for the sector_ HCL Tech and TCS key beneficiaries

In our view, HCL Tech and TCS will be the main beneficiaries of the recent
rupee depreciation. Our sensitivity analysis suggests that, ceteris paribus, for
every 1% depreciation of the INR vs. the USD, earnings of the top-tier Indian IT
service companies are likely to increase by 1.5-1.9%, while EBIT margins will
be up 20-25bps in FY14E. We believe HCL Tech and Infosys are the most likely
to post better-than-expected margin performance if the rupee weakness
persists, while TCS will reinvest the gains from the weaker rupee to improve its
top line. We reiterate our positive view on the sector, with TCS and Tech
Mahindra our top picks.
Prolonged rupee weakness could accelerate turnaround at Infosys
Rupee depreciation further improves the competitiveness of the Indian IT
service companies. In particular, it will enable vendors to enhance win rates in
IMS (infrastructure management services) based deals. Margin pressure
exerted by these deals (which, in some cases, involve transfer of assets and
employees) can be offset by gains from a weaker rupee. In keeping with recent
trends, we believe TCS will use the current rupee weakness to win more
transformational engagements (involving IMS) and improve its top line, while
maintaining operating margins. With regard to Infosys, a weaker rupee can
help accelerate the ‘course correction’ undertaken by the company. In the
short term, however, we expect it to partially offset the impact of (a) pricing
pressure, (b) wage increases, (c) the deferred cost of the Lodestone acquisition
and (d) heightened investment in sales.
Weak rupee to improve operating margins by 100-150bps in the June-Q
In the June-Q, the rupee has depreciated 5% (average for the quarter) vs. the
USD. We believe this will likely improve operating margins (EBIT) positively by
100-150bps. For TCS, wage hikes offered during the quarter will affect
operating margins by 200-250bps qoq. Overall, we expect TCS to deliver a
25.5% (-100bps qoq) EBIT margin during the Jun-Q.
Valuing Indian IT service stocks at PE of 13-20x FY14E earnings; risks
We continue to value the stocks at 13-20x one-year forward earnings (relative
to their historical trading range, comparing with peers, as well as growth rates)
and will revisit our earnings estimates and target PE multiples once there is
more clarity on the nature and size of IT budgets and the sustainability of the
demand pick-up. The key sector risks relate to cross-currency headwinds.