CMP: Rs 434 Target Price: Rs 490
Delivers miles ahead of expectations with revenues of ~US$ 1,481 mn (+3.3% qoq) along with eye popping 100 bps qoq margin expansion. Sequential revenue growth performance worth appreciating in the backdrop of ~270 bps increase in offshore % of revenues to 50.4%.
Operating metrics performance leaves little to complain with revenues from Financial Services/US up ~6%/3% qoq.
Increase FY10/11 EPS estimates by ~15%/19% to Rs 30.2 and Rs 33.1 driven by margin resilience and lower forex losses with help from US$/INR appreciation (note that during FY09, EPS was impacted by ~Rs 4 on a/c of forex losses alone)
Upgrade TCS to ACCUMULATE from HOLD with a revised March'11 target price of Rs 490 at 5% discount PER multiple to our implied FY11 P/E multiple for Infosys.
Expect TCS's recent streak of outperformance combined with narrowing of valuation discount vis-à-vis Infosys to continue
Q1FY10 Results; Delivers miles ahead of expectations
TCS reported US$ revenues of ~US$ 1481 mn (+3.3% qoq,) miles ahead of est. contrary to our expectations of flat revenues. Revenues from financial services were up by ~6% sequentially, a big positive surprise considering that we expected only the fall in revenues to be stalled driven by no macro shock. We highlight that the sequential revenue growth performance stands out especially in the wake of ~270 bps qoq increase in offshore % of revenues to 50.4% (highest ever in TCS's reporting history). EBITDA margins were up by ~100 bps sequentially to 27.2%, once again highest ever in the past 9 quarters.Net profits at Rs 15.2 bn (+15.7% qoq) beat estimates driven by revenue/margin out performance.
Operating metrics leave little to complain about
TCS's operating metrics performance was also strong along with reported financials with revenues from financial services/ US up by ~6%3% qoq. We point out that the improvement in trend from financial services is encouraging given that TCS has suffered materially over the past few quarters given it's highest exposure (amongst peers) to the troubled financial services customers. While revenue performance from Manufacturing, Telecom and Hi Tech continued to be weak (along expected lines) we clearly are surprised by the strong show in financial services. Revenues from UK were down by ~2.5% sequentially to US$ 250 mn despite significant cross currency benefit due to continued weakness in a top telecom client.
Increase FY10/FY11 EPS estimates by ~15%/19%
We have increased our FY10/FY11 EPS estimates by ~15%/19% to Rs 30.2 and Rs 33.1 aided by (1) a superlative Q1 performance, (2) increase in US$ revenues estimates by ~2.7%/3.6% for FY10/FY11 to US$ 6,050 mn and US$ 6,795 mn respectively, (3) increase in margins assumptions driven by significant cost controls shown by the company in the recent quarters and (4) lower assumption of hedge losses helped by INR appreciation V/s US$ (note that TCS's EPS was hit by ~Rs 4/share on a/c of forex losses during FY09).
Upgrade Stock to ACCUMULATE; TP of Rs 490
We upgrade TCS to ACCUMLATE (from HOLD earlier) with a revised target price of Rs 490 (V/s Rs 295 earlier), based at 5% P/E discount to our implied target multiple on FY11 earnings for Infosys. We would expect TCS's recent streak of outperformance and narrowing of valuation gap vis-à-vis Infosys to continue further, however this would demand sustained delivery from TCS (note TCS's performance has been patchy during FY09 and has been weak as compared to Infosys for several quarters until June'09, refer comparison below).
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