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Tata Consultancy Services – Review

October 17, 2007

TCS reported good 2QFY08 results – revenues grew 10.8% qoq to $1.42b (our exp: $1.38b) and EBITDA margins at 26.3% (exp: +26.1%) were up 80bp qoq. Net profit for Q2 was Rs12.15b (exp: Rs12b). Volumes in the international business were up 9% qoq.

TCS reported another quarter of pricing increase – realizations improved by ~85 bp qoq. Offshore proportion of revenues increased by ~190bp qoq. Pricing increase and higher offshore proportion resulted in margin expansion despite INR appreciation.

Management remains confident of strong deal flows and improved client mining over the next few quarters. Pricing trend continues to remain positive with 5-8% hikes in new deals and 3-5% hikes in renewals.

Kotak Research expects EPS growth of 22% YoY for FY08 at Rs.51.5. FY09 EPS has been
estimated at Rs.60. The rupee is assumed to be at Rs.38.50 per US dollar by FY09 end. BUY TCS with a price target of Rs.1297, implying a P/E of about 22x on FY09 estimates.

Citigroup Researach estimates a fully diluted EPS of Rs 51.55, 62.65 for FY08 and FY09 respectively. Target price of Rs1,460 is based on a P/E of 24x FY09E EPS, derived from a 4% discount to our target 25x FY09E EPS for Infosys.

Motilal Oswal revised EPS estimate of Rs51 and Rs61.8, the stock trades at a P/E of 21x FY08E and 17.4x FY09E respectively. Valuations at 17.4x FY09E earnings offers room for upside. Maintain Buy with a target price of Rs1,360.

CLSA expect underperformance to continue for some more time. Current 16-18% EPS Cagr for FY07-10 remains the key drag on the stock. CLSA has set a price target of Rs 1,135 for the stock.

DSP Merill Lynch says the stock is attractively valued and has a Price Objective of Rs1360 to Rs 1480 is at a rolling forward multiple of 20x 12 months earnings ended Sep 09 at a 10% discount to Infy’s median PE or an implied FY09e target multiple of 21x.

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