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STOCK UPDATE Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,373
Current market price: Rs1,125 Upgraded to Buy with price target of Rs1,373 Result highlights -
Smart performance, ahead of expectations: Tata Consultancy Services (TCS) has yet again outsmarted street expectations with a commendable volume growth, in line margin performance and material outperformance on the net profit level driven by a strong top line growth and higher other income. Revenues in USD terms grew by 7.5% quarter on quarter (QoQ) to $2,412 million (our estimates was of $2,402 million), primarily driven by a strong sequential blended volume growth of 7.4%, while a marginal 0.5% decline in pricing was negated by a 60 basis points cross currency benefit. In INR terms the consolidated revenues are up by 6.3% QoQ to Rs10,797 crore, marginally ahead of our estimate of Rs10,751 crore. International revenues are up by 5.7% QoQ while India revenues are up 12.2% QoQ. For Q1FY2012, the earnings before interest and tax (EBIT) margin has declined by 210 basis points QoQ to 26.2% (in line with expectations) on account of wage hikes effected during the quarter. The other income has jumped by 29% QoQ to Rs288.6 crore, driven by foreign exchange (forex) gains of Rs80 crore. The net profit remained stable at Rs2,380.3 crore (our estimate was of Rs2,259.9 crore which is a fall of 5.9% QoQ) as against Rs2,380.9 crore in Q4FY2011. The net profit is materially above Street expectations as well as our estimates. -
Management exudes confidence: TCS' management continues to exude confidence on the demand environment notwithstanding macro uncertainties. The company has won ten key deals during the quarter and has a strong deal pipeline for the coming quarters. The top 15 deals in the pipeline are well distributed across geographies and there is a good blend of transformational deals. The management is seeing a good amount of deals in the discretionary spending space and also stated at stable cycle time for decision making, contrary to Infosys' management commentary. The pricing environment remains stable. On the visa front, though there has been an increase in the visa rejection rate on a year on year basis, the company is getting the necessary visas as per its requirement. -
Valuation and view: TCS has positively surprised with a smart performance during the quarter and the buoyant management commentary provides further comfort to our estimates for FY2012 and FY2013. We continue to remain positive on TCS and expect it to continue with its strong performance in the coming quarters. We have broadly maintained our estimates for FY2012 and FY2013, however on the back of consistent outperformance and more predictable earnings visibility, we are increasing our target multiple to 22x from 21x earlier (we are now valuing TCS at a 10% premium to Infosys' target multiple of 20x). Consequently, we are revising our target price to Rs1,373 and are upgrading our rating from Hold to Buy. Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,466
Current market price: Rs1,431 Q1FY2012 results: First-cut analysis Result highlights -
Unfavourable product mix within the motorcycle segment brings down realisation: Bajaj Auto's Q1FY2012 revenue came in at Rs4,777.3 crore, indicating an increase of 23% year on year (YoY) and of 13.7% quarter on quarter (QoQ). The net realisation declined by 1.3% QoQ despite price hikes of 2-3% effected in the domestic market in April 2011 and in the export markets in May 2011. An unfavourable product mix within the motorcycle segment affected the realisation wherein the contribution of the 125cc+ bikes declined from 46% in Q4FY2011 to 43% in Q1FY2012. -
Commodity cost pressure continues; so does prudent cost management: In Q1FY2012 the contribution per vehicle declined by Rs904, which was the lowest in the last four quarters. The raw material cost/sales increased by 140 basis points YoY and by 168 basis points QoQ as commodity cost pressure continued and price hikes were taken selectively. However, the management continued its prudent cost management efforts wherein the employee expenses/sales declined by 30 basis points YoY and by 20 basis points QoQ. Consequently, the operating profit margin (OPM) came in at 19.1% (lower than the expectation of 19.8%). -
Other income lower than expectation; higher production from Pantnagar leads to lower tax rate: The other income at Rs73 crore was lower than our expectation of Rs115 crore. The tax rate came in at 25.4%, the lowest in the last eight quarters, primarily on account of higher production from the Pantnagar plant. The capacity at the Pantnagar plant, which produces the Discover and Platina brands, has been increased from 1.2 million units to 1.8 million units. The profit after tax (PAT) grew by 20.5% YoY to Rs711.6 crore (which was lower than our expectation of Rs751 crore). -
Aiming at further market share gains with new launches in the pipeline: Since the launch of the new Discover 125cc in April 2011, the company has increased its overall domestic market share in the motorcycle segment from 24% to 26.5%. Moreover, the company is planning to launch the new Boxer 150cc in August 2011, which will be followed by the launch of Duke in H2FY2012. Going forward, we expect the company's market share to improve further, driven by the recently launched Discover 125cc and the yet to be launched Boxer 150cc. The management is targeting a 30% plus market share in the medium term. -
Outlook and valuation: Though the Q1FY2012 results of Bajaj Auto were below our expectation, the company's management commented that the raw material contracts for Q2FY2012 will remain stable. Going forward, the margins are likely to remain at the current levels as the company had also taken price hikes in the export markets effective from May 2011. The management indicated that it is not contemplating any further price hike in the domestic market, but the export market could see further price hikes if the benefits under the Duty Entitlement Pass Book scheme expire in September 2011. Currently we have a Buy recommendation on the stock and will review our estimates after the conference call with the company's management.
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