We reiterate our buy rating on Tata Consultancy Services (TCS) with a target price of Rs 2,570 per share, valuing the stock at 20x FY16f EPS of Rs 128. The 20x multiple is at the higher end of TCS’ historical valuation range. We expect this to sustain on higher predictability of growth/margins and better positioning to benefit from the demand upturn.
We attended TCS’s analyst briefing on June 13 and see no change in revenue outlook. H1FY15f will be better than H2FY14 and Q1FY15f is tracking to be better than Q4FY14. Most of the larger verticals are expected to grow in line with the company average, while smaller verticals are expected to outpace the company average.
Europe will grow faster on outsourcing-led demand, India will be flattish, while the US’ demand remains strong with no lingering effects of issues seen in the past quarter. Demand continues to be more project-base in the US. Digital remains a strong area of demand and can manifest itself in any of the horizontals. Multi-service deals have seen no change in trend versus earlier.
We believe it is positive that TCS management is indicating the status quo for its earlier outlook of H1FY15f being better than H2FY14, and Q1FY15f being better than Q4FY14 and FY15f being better than FY14 given that TCS will need 4-5% q-o-q USD revenue growth in Q1FY15f (likely to be the best revenue growth among tier-1 IT on our estimates) for it to better its FY14 revenue growth. So, we remain positive on TCS given its best-in-class revenue and EPS CAGR.