'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

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