We upgrade Tata Consultancy Services (TCS) to ?buy? from ?hold? and retain our target price of R1,588 per share. TCS has outperformed Infosys and Wipro over the past few years on both revenue and margin fronts, which made its valuations expensive.
However, a correction of 9.8% in the past three months provides valuation comfort as it is currently trading at P/E of 15.9x FY15e EPS of R88.2 (at USD/INR of 53).
We expect the outperformance to continue over the next couple of years as it reaps benefits of investments made in sales and marketing. While we always expected the company to be the key beneficiary of the uptick in demand and favoured it owing to strong execution, valuations had outweighed estimates.
TCS has continued to maintain robust growth momentum in FY13 despite a less-than-favorable market environment, which is amply reflected in 13.7% revenue growth and over 24 large deals won during the year.
Further, the management reiterated its view of FY14 being better than FY13. It also expects Q1FY14 growth to outpace that in Q4FY13 (3.1%) with some cross currency swings (30-60 bps). While TCS has successfully harnessed margin levers like offshore shift and utilisation, further upside from these is limited. Hence, we expect margin to be maintained around 27-28% going forward.
The company anticipates more or less stable growth across business verticals .