"TCS reported a strong set of numbers in Q3FY13. The highlight was the operating margin which expanded by 51bps contrary to expectations of a decline by a similar figure due to increased furloughs. The revenue for the company grew by 2.88% to INR 160.7bn. The company however reported a lower PAT growth at 1.13% sequentially due to forex loss of INR 734.3mn against a gain of INR 921.5mn in the previous quarter. Considering TCS's superior performance quarter after quarter (both on margin and growth fronts), we expect it to trade at a premium to its peers.
TCS reported a sequential revenue growth of 3.33% to $2,948mn (SPAe: $2,944mn) in-line with our expectations. The INR revenue growth of 2.88% was driven by volume growth of 1.25%, improvement in realization by 1.3%, currency tailwinds (+24bps) and onsite shift (+11bps). The company saw furloughs from not only the Manufacturing and HiTech sector but also the BFS and Insurance domain; however the improved realization aided in offsetting some of these headwinds.
Operating margins at 27.26% saw a sequential gain of 51bps on the back of (i) Productivity Improvement (+82bps) (ii) Offshore leverage (+16bps) and (iii) Exchange gains (+3bps); however it was partially offset by (iv) increased SG&A spend (-51bps) as a % of revenue. The PAT margins were down 34bps to 22.35% due to lower other income on account of forex loss of INR 734.3mn against a gain of INR 921.5mn in Q2FY13.
The company added 31 new clients and signed 7 large deal - 2 in Banking and 1 each in Telecom, Retail, Govt., Travel and Healthcare. Four of these deals originated in US and one each in LatAm, APAC and Europe.
The management remains confident on beating Nasscom FY13 revenue growth guidance. We expect the company to beat the upper band of the guidance as it would require a 3.5% CQGR USD revenue growth in Q4FY13, which we feel is achievable. The company also guided for 25,000 fresher hiring for FY14 which is lower than the 30,000 for FY13 but in-line with our expectations given the lower attrition rate and higher onsite hiring target.
We have factored USD revenue CAGR of 15.6% resulting in an EPS CAGR of 19.6% over FY12-14E with operating margins at 28%/ 27.5% for FY13E/14E. However, due to premium valuation and limited price upside, we continue to recommend HOLD with an 15- month TP of INR 1,345.0 at 17.7x FY14E earnings," says SPA Research report.
Institutional holding more than 40% in Indian cos
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