Recommendation: Buy
CMP = Rs 1,705
Price target: Rs 1,980
- Leader all the way: In addition to being the largest information technology (IT) services vendor, TCS has the largest practice in most of the fast-growing new service offerings like package implementation, remote infrastructure, testing and engineering services, which is something not highlighted in its consolidated reporting structure.
- Boosting BPO business: TCS lagged behind its peers in terms of the ramp-up in the BPO business. However, the recent acquisition of Chile-based Comicrom and the take over of assets in the Pearl deal has dramatically enhanced the scale of the company’s BPO operations and more importantly the skill pool in the lucrative insurance and pension industry vertical.
- Eyeing the large deals: Given the range of its offerings, the scale of operations in each horizontal practice and its global delivery presence, TCS is ahead of some of its peers in terms of bagging large outsourcing deals. It is effectively leveraging its leadership position to aggressively exploit the vast opportunities emerging from the scheduled renewal of the numerous outsourcing deals globally.
- Margin pressure can be mitigated: The concerns related to the severe pressure on its profitability from the integration of low-margin acquisitions and some large outsourcing deals have resulted in the scrip’s underperformance on the bourses. However, the company has levers to mitigate the adverse impact in the short-term and improve the overall profitability gradually over the coming quarters.
- Limited downside risk: Given the scrip’s recent underperformance, the premium attracted by TCS over the benchmark indices has narrowed down considerably and would limit the downside. With the estimated earnings per share CAGR of over 25% in the two-year period FY2006-08, I recommend a Buy on the stock with a target price of Rs 1,980, which works out to 21x its FY2008E earnings.
