We upgrade TCS to ?overweight? on better margin outlook and increase our price target to R1,520 (from R1,405). We are 4% above consensus FY14e earnings. Our target implies a potential return of 18.7%, including dividend yield, which is above the HSBC neutral band.
The Q3FY13 results may not be a positive trigger, but we expect one-year stock return to be driven by a modest earnings upgrade and earnings growth in FY14. The stock is currently trading at a P/E of 18x and 16x on FY13/14e EPS, respectively. We revise our FY14 estimates by 2%. We maintain a valuation multiple of 18x and roll over our target valuation to CY14 earnings (from FY14e).
The management remains optimistic on the demand environment for 2013. Consistent with the commentary by Infosys, TCS expects offshoring to increase over the next year. Further, TCS is seeing a pick-up in discretionary spending and is not seeing any delays in decisionmaking or customers issuing cautionary statements.
TCS reported revenues of $2.94 billion, up 3.3% q-o-q and marginally beat HSBC and consensus expectations of c3% sequential growth. This constituted volume growth of 1.25%, increase in blended realisation of 1.3% and a cross currency benefit was 0.7%.
The volume growth was impacted by higher-than-expected furloughs at client locations in manufacturing, hi-tech industry and a few in banking as well. The volume growth is marginally lower compared to Infosys (c1.5% q-o-q organic) for the quarter.
Ebitda margins surprised positively, expanding by c50 basis points q-o-q, owing to higher productivity (+80 basis points) and an offshore shift (+20 basis points) offset by an increase in SG&A costs (-50 basis points). Other income contributed to 4.6% of profit before tax in the quarter compared with 6.9% in the previous quarter. The company recorded a forex loss of R53.6 crore in the quarter compared to a gain of R1,050 crore in the previous quarter. The EPS for the quarter was R18.1, representing a growth of 23% y-o-y.
The company has been expanding its operations, especially in the emerging markets. North America, UK, Continental Europe together contributed to 79.2% of total revenues in the quarter compared to 79.4% in Q2FY13 and 80% in Q1FY13. India grew 4.8% q-o-q and currently contributes to 7.6% of the revenues compared to 7% in Q1FY13.
HSBC
