TCS All-round performance, raise target price; Hold :: Anand Rathi

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TCS
All-round performance, raise target price; Hold
 Stellar quarter. TCS’ 2QFY11 performance was robust, with
11.7% qoq revenue growth to US$2,004m (constant currency
growth of 11%), mainly on 11.2% sequential volume growth. The
72-bp increase in EBITDA margin was despite 166bp negative
impact due to higher variable pay and promotions. We raise our
target price to `1,070 from `920 and retain a Hold on the stock.
 Healthy outlook. TCS saw growth across geographical areas, with
deals (entailing discretionary spend) being won in the quarter (eight
large deals bagged). The company raised gross headcount guidance
to 50,000 for FY11 from 40,000 earlier.
 Key points. Even as its Energy & Utilities, Media & Entertainment
and BFSI verticals saw healthy traction, TCS bagged deals across
most sectors. It has `71.7bn in cash and cash equivalents. Supplyside
challenges increased, with attrition rising 100bp qoq to 14.1%.
 Change in estimates, introducing FY13 estimates. We raise our
FY11 & FY12 earnings estimates 6.6% & 11.3% respectively to
`41.6 & `49.7, mainly due to better-than-expected demand outlook
and margin resilience. We expect about 17% volume growth, flat
pricing, a 40-bp margin expansion over FY12, and a tax rate of 23%
(constant, compared with FY12).
 Valuation and risks. We raise our target price to `1,070, implying
Sep’11 PE of 24x (maintain earlier PE of 24x). Risks: i) New
services could provide growth impetus ii) Accretive acquisitions.