Tata Consultancy Services BuyPrice target: Rs 1,121

Tata Consultancy Services

Cluster: EvergreenRecommendation: BuyPrice target: Rs1,121Current market price: Rs727
Results in line with expectations
Result highlights
TCS results for Q1FY2009 were largely in line with our expectation.
The revenues grew by 6.0% quarter on quarter (qoq) to Rs6,410.7 crore in Q1FY2009, boosted by the depreciation of the rupee (5.1%). In the dollar terms, the revenues during the quarter grew at a muted 0.4% qoq, driven by a volume growth of 1.3% and a favorable service mix (50 basis points). However, the revenue growth was partially mitigated by a 90-basis point decline in the pricing during the quarter.

The earnings before interest and tax (EBIT) margin declined by 26 basis points to 23.9%, primarily due to decline in pricing (294 basis points), wage hike (196 basis points) and higher on site revenue contribution (17 basis points). However, this was partially offset by the positive impact of the rupee depreciation (263 basis points) and the reduction in SG&A expenses (217 basis points) due to cost containment programme.
The reported net income during the quarter declined by 1.0% qoq to Rs1,243.6 crore. The company mentioned that there was a tax reversal of Rs33.5 crore during the quarter. Adjusting for this, the company's net income declined by 3.6% qoq to Rs1,210.1 crore, which is in line with our expectation of Rs1,212 crore.
The decline in the net income during the quarter was largely due to a lower other income (Rs33.2 crore in Q1FY2009 v/s Rs117.9 crore in Q4FY2008) due to foreign exchange (forex) losses of Rs75.3 crore in Q1FY2009. However, this was partially mitigated by lower depreciation expenses, as the company increased the average life of the computers from two years to four years.
The company also highlighted that two of its clients in the banking, financial services and insurance (BFSI) vertical, which led to a sequential decline in the vertical’s revenue, are now ramping up and the business from these clients is expected to the pick up from Q2FY2009 onwards. However, the revenues from one more European client in the BFSI vertical is expected to come down due to its de-merger.

TCS closed 12 large deals during the quarter. Out of the 12 deals, three deals were in the range of $75-100 million. The company also highlighted that the large deals are ramping up especially in the manufacturing, retail, and utilities verticals. Currently, the company has a deal pipeline of 20 qualified large deals.
TCS also highlighted that the pricing scenario has remained stable during the quarter and it has not seen any cut in the price re-negotiation even for the large clients. However, the company did mention that it is cautiously optimistic due to the deteriorating macro environment.
We have revised our exchange rate assumption to Rs42 for FY2009 and Rs41 for FY2010. However, we have lowered our other income on account of the rupee depreciation leading to forex losses. We have also increased our effective tax rate for FY2009 to 14%. These factors have led to downward revision in our earning estimates for FY2009 by 1.9% and for FY2010 by 1.5%.
At the current market price, the stock is trading at attractive valuation of 12.4x FY2009 and 10.8x FY2010 earning estimates. We maintain our Buy recommendation with price target of Rs1,121.