We maintain our ‘neutral’ rating on TCS as we believe strong execution and revenue growth justify the rich valuations of the stock. We have a 12-month target price of R1,345 based on a P/E of 17x, which we apply to our EPS estimates FY14. As TCS has shown stronger revenue growth despite slowdown, we apply a target multiple that is a 30% premium to that for Infosys.
At its analyst meet, TCS’ CFO provided a more sanguine outlook for the December quarter and FY14. The company exuded confidence for FY14 growth due to a strong pipeline, ramp up in deal wins and positive client discussions on discretionary spending. We believe that this performance should support TCS’ lead over peers. In the midst of macro pressures, TCS has continued to outperform peers and gain market share, on a larger revenue base. Management sees a continuation of market share gains that should drive growth into FY14 even if budgets stay flat. TCS’ growth and execution have matched the high hurdle rate set by its valuation premium, but a slowdown is apparent.
TCS maintained its earlier commentary of a slowdown in H2FY13 with the December quarter feeling the impact of some furloughs, hurricane Sandy and one less working day (furloughs in the current quarter have not surprised negatively). Growth is likely to be well spread out across geographies and verticals (in manufacturing/hi-tech these have been in line with normal seasonality and in BFSI higher than conventional years but within company expectations), except telecom which continues to remain weak. Hi-Tech will show seasonal weakness in the December quarter. US dollar revenue growth would likely see a cross currency tailwind in the quarter.
Volume growth will slow down from the previous quarters (up 5.3% and up 5% q-o-q in June and September quarters, respectively), in line with previous commentary. In addition, margins could show q-o-q volatility (26.8% ebit in September) due to manpower expansion but management was comfortable with FY13 ebit margins at c27%. Over the longer term, TCS remains focused on maintaining employee costs at 55% revenue and other costs at 18%. Sustained volume growth and productivity