Maintain buy on TCS despite cross-currency headwind

Published: December 17, 2014 12:10:37 AM

Maintain ‘buy’ on TCS with a revised target price of R2,770..

Maintain ‘buy’ on TCS with a revised target price of R2,770 (earlier R2,790). We lower our FY16e/FY17e EPS estimates by 2.1% to incorporate base effect of the cross currency impact in the quarter. TCS trades at 20x one-year forward consensus P/E and despite the recent correction seems priced to perfection with little margin for error. The marginally lower than expected growth indicated by management versus that at the beginning of the year causes us to reduce our target multiple from 21x to 20x, in line with recent average.

Stock sentiment could be exacerbated by the high expectations, reflected in valuations. The moderation of outlook commentary from the management does magnify the risk of near term underperformance. It remains to be seen if the money exiting TCS will – 1) move into other IT stocks; or 2) move into cyclicals (banks / financials).

TCS in its analyst meeting indicated that cross currency is likely to have a c220 bps negative impact on the USD reported growth. Despite this, we believe TCS should continue to lead industry on growth in FY16. We reduce our estimates to incorporate the cross currency impact and assign a lower target multiple to incorporate the commentary.

Big picture on TCS is still positive. We are projecting revenue CAGR of 15.8% in FY14-17e, the second highest in our large cap coverage. While visibility has reduced for now, we believe that the IT services sector is likely to continue showing low to mid teens growth, supported by the strong hiring trends in the recent quarter.


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