Fw: Investor's Eye: Update - Tata Consultancy Services (Downgraded to Hold), Telecommunications - (Led by incumbents the August subscriber base fell by 7.1mn subscribers)

 

 

Investor's Eye [September 18, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   Tata Consultancy Services Cluster: Evergreen Recommendation: Hold Price target: Rs1,364 Current market price: Rs1,302 Downgraded to Hold  We attended the pre-quarter analyst briefing of Tata Consultancy Services (TCS). The management maintained its optimism about the demand, which, it believes, will be driven by the timely closure of deals and a pick-up in the discretionary spending on new technologies. Though the volume growth for Q2FY2013 is expected to remain relatively lower than that in Q1FY2013, TCS is comfortably placed to lead the industry in terms of revenue growth on a constant-currency basis in FY2013. On the margin front, the management indicated that cost pressure resulting from the ramp-up in the onsite projects and the geographical mix would also restrict the margin improvement. In view of the limited upside in TCS in the medium term, we have downgraded our rating on the stock from Buy to Hold with a price target of Rs1,364.  Deal closure meeting expectations, volume growth to remain strong: The volume growth is expected to remain relatively lower in Q2FY2013 compared with 5.3% in Q1FY2013. Q1FY2013 saw the spill-over of revenues from Q4FY2012. In terms of the industry verticals, insurance, retail, hitech and manufacturing continue to witness strong traction whereas the company's largest vertical, banking and financial services, is expected to grow at a stable pace on account of its large base. On the geographical front, the key geographies continue to show decent traction whereas the emerging regions, like the Asia-Pacific and South America, are witnessing increasing traction. After a steep fall in Q1FY2013 the business in India is picking up. Going forward, the management does not expect any budget flush in the December quarter; however, it remains fairly confident of leading the industry in growth in FY2013 on a constant-currency basis. In the last four quarters, TCS' revenues grew at a compounded quarterly growth rate (CQGR) of 2.6%. To achieve a 13%+ growth in FY2013 it needs to grow at a CQGR of 3.7% in the remaining three quarters.  Margin performance to remain muted: The earnings before interest and tax (EBIT) margin is likely to remain muted sequentially on account of a ramp-up in the new projects, which require higher onsite efforts. Further, the incremental higher contribution from the relatively low-margin geographies, like Asia-Pacific and South America, would restrict the margin improvement. TCS' management continues to maintain its threshold EBIT margin commitment of 27%, assuming a dollar/rupee rate of Rs48. However, higher "re-investments" of the currency benefits into the business has restricted any meaningful improvement in the margin in the last one year.  Other highlights: (1) The company is fully hedged till Q3FY2013 and has extended its hedging for Q4FY2013. The total hedge book stands at $1.8-2 billion. (2) The management does not expect any net foreign exchange (forex) loss in Q2FY2013 as compared with the last quarter (a forex loss of Rs82 crore); in fact, TCS could end up with a marginal gain. (3) The management does not see any irrational pricing behaviour from the clients and expects the pricing to remain stable at the portfolio level. (4) It foresees a strong pipeline of decent-sized deals. (5) The telecommunications vertical remains subdued. Valuation: Among the top information technology companies, TCS remains impressive with the strong predictability of its earnings. However, in the run-up to the announcement of its Q2FY2013 results (on October 18, 2012) and the likely absence of any material positive surprise in it, the stock is likely to underperform the broader market indices in the near to medium term. In the last one year the stock has outperformed the broader market with a 28% return. At the current market price of Rs1,302, the stock trades at 18.3x and 15.8x FY2013 and FY2014 earnings estimates respectively. In view of the limited upside in the stock in the medium term, we have downgraded our rating on it from Buy to Hold with a price target of Rs1,364.    SECTOR UPDATE Telecommunications Led by incumbents the August subscriber base fell by 7.1mn subscribers Key points The Cellular Operators Association of India (COAI) has released its GSM subscriber numbers for August 2012. For the month almost all the operators posted a decline in their subscriber base barring Aircel, which posted a minor gain. The total subscriber base for August 2012 (excluding Tata Teleservices and Reliance Communications) stood at 671.95 million, down about 1.05% month on month (MoM) from ~679.05 million in July 2012.  The three major incumbents, Bharti Airtel, Vodafone and Idea Cellular, which comprise about 68% of the total subscriber base, for the first time reported an overall decline in their subscriber base. During the month, on the net addition front, they collectively shed ~5.1 million subscribers.  One of the major reasons for the reported fall in the net additions was the disconnection of the unused numbers and the withdrawal of offers from the telecommunications (telecom) companies. Thus, we do not read much into this decline in net additions seen in August this year. We would offer our comments after looking at the active subscriber net additions and the subscriber base. Click here to read report: Investor's Eye < /font>   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.