Recommendation: Buy (very strong!!!)
CMP = Rs 887
Price target: Rs 1,079
Key points:
- Tata Consultancy Services (TCS) has reported a growth of 2.9% qoq and of 18.4% yoy in its consolidated revenues to Rs 6,094.7 crore for Q4FY2008. The sequential revenue growth was contributed by a volume growth of 4.8% and rupee depreciation of 1.1%. However, the revenues during the quarter were adversely affected by a 1.6% decline in the blended realisation and a 1.4% decline due to a change in the revenue mix (following a higher offshore proportion).
- The operating profit margin (OPM) declined by 118 basis points to 25.5% sequentially. The OPM was dented by lower blended realisation (a 1.6% sequential decline) and an increase in the overhead cost as a percentage of sales (up 70 basis points to 21.1% of the sales). On the other hand, a favourable offshore-onsite mix and a 320-basis-point improvement in the utilisation rate (including trainees) to 75.8% partially cushioned the pressure on the OPM. Consequently, the operating profit declined by 1.7% qoq to Rs 1,552.4 crore.
- The other income declined sharply by 25.4% qoq to Rs 78.1 crore. Moreover, the company's effective tax rate increased to 13.5% in Q4FY2008 from 12.7% in Q3FY2008. Consequently, the net income fell by 5.6% qoq to Rs 1,255.9 crore, which was below our expectation of Rs 1,377.7 crore.
- The performance was largely dented by a slowdown in the business from two of its top clients (from the banking and financial services domain) and project delays in the other verticals in the last quarter. As a result, a 4.8% sequential volume growth didn't completely translate into higher revenues and improved margins. The stock is expected to under-perform in the near term.
- Given the sluggish demand in the BFSI vertical, the management is cautiously optimistic on the demand environment. The scenario is expected to improve, moving ahead.
- The company closed six large deals during the quarter. The deal pipeline is also healthy (25 deals with the run rate of over US$50 million) and the management expects the growth to improve in the coming quarters. TCS has set a target of 30,000-35,000 gross employee additions in FY2009.
- At the current market price, the stock is trading at 14.9x FY2009 earnings estimate and 14.0x FY2010 earnings estimate.
- I maintain very strong Buy recommendation on the stock with a price target of Rs 1,079 over next 6 months.
Be a better friend, newshound, and know-it-all with Yahoo! Mobile. Try it now.
