TCS – Strong quarter, growth outlook bullish

TCS Revenues increased ~3.1% QoQ to $1.7bn – constant currency growth was ~4.2%. Revenues are in line with our expectations but may disappoint bullish expectations post the strong Infosys top-line numbers last week. TCS’s results confirm our thesis of broad-based growth across verticals. Even ‘weak’ verticals, such as manufacturing and telecoms, grew 3% QoQ each in line with the company’s growth.

Management indicated that the target is to have 27% EBIT margins at currency rates of Rs. 46/$ (not a guidance though). However, given the significant wage hikes (impacting 1Q margins by ~250bps) and currency headwinds, managing margins in a narrow band will be a challenge.

TCS signed 10 large deals including a USD500m+/10yr deal. TCS’s guidance of another 30,000 gross hires in FY11, in addition to the ~17,000 hired this quarter, implies initial volume growth planning for 15%+, in line with peers. Management also stated that if demand continued to pick up, one could see pricing power return in H2FY11.

TCS is expected to Report the following EPS for FY 11 and FY 12 according to various estimates,
BOFA Merrill – 40 and 45 with a target price of Rs 920
HSBC – 39 and 43 with a price target of Rs 890
Citi – 38.7 and 42 with a target of 855
Credit Suisse – Rs 40 and Rs 46 with a target of 940
Kotak – 41 and 46 with a target of 900
JP Morgan 38 and 45 with a target of 850

Investors can consider exposure to the stock on correction looking into USD Vs INR prevailing at that time.