'Buy' rating for Tata Consultancy Services, Pace of revenue growth to accelerate: BofAML

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SummaryCompany in a strong competitive position given its scale, and investments in digital space.

Tweak up estimates/PO on strong outlook in international business: Tata Consultancy Services profit after tax was 2% ahead of our estimate, on in-line revs (revenues) and margins, and slightly higher forex hedging related gains. International revs grew at a stronger than expected 3.8% sequentially in USD terms while India (6% of revs) declined higher than expected by almost 6% q-o-q.

CEO Chandra expects rev growth to accelerate in FY15, given an improving environment and TCSs strong competitive position. We forecast largely steady margins. We tweak up our estimates by 1-2% and raise PO (price objective) to Rs 2,650 (vs Rs 2,600) at a target CY15e PE (price-to-earnings multiple) of 20x, in line with its current one-year fwd PE and our forecast CY13-15e EPS CAGR (earnings per share, compound annual growth rate) of 21%.

Revenue outlook continues to trend up

Bullish commentary on deal pipeline: Management commentary on the call suggested a strengthening deal pipeline for TCS going into next year driven by:

n Improving market presence for TCS in continental Europe

n Improving environment for discretionary IT spends like digital initiative and regulations related spends

n Continuing market opportunity around cost optimisation/ simplification of IT landscape.

In particular, it highlighted the emerging opportunity in the digital space (a collective term for opportunity relating to cloud, mobility, big data & analytics, social and artificial intelligence) that is likely to emerge as a key driver of incremental discretionary revenues. Per company, project sizes in this space have been gradually increasing over the past few quarters and are likely to remain on a secular growth curve over next few years.

We expect services spends around big data and mobility to be on cusp of entering a high growth phase. TCS appears best positioned amongst India-listed integrated vendors to benefit from this opportunity.

Company expects FY15 to be a year of higher growth than FY14 despite weakness in domestic market likely continuing until Jun/Sep due to elections in India.

Large deal win momentum on track: TCS won a healthy eight large deals this quarter. This is despite push out of decisions in certain deals in retail vertical from December to March quarter. We expect an improving outlook for Indian vendors in the large deals space driven by accelerating growth in continental Europe and Infrastructure services. TCS is well positioned to benefit from both these trends. Hence, we continue to expect a healthy momentum in large deal wins for the company.

Hiring

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