MUMBAI: Asit C Mehta has recommended ‘buy’ on Tata Consultancy Services for a target price of Rs 1,053 based on 16x FY10E EPS of Rs 65.8.
TCS is increasing its employee strength in emerging markets such as China and Latin American countries, which provide dual advantage of lower delivery costs and opportunity in terms of fast growing local IT market.
Besides Chinese and Latin American markets, it is also targeting high growth from Indian markets. This will support its revenue growth despite concerns about the US economy.
TCS is diversifying its services portfolio, whereby its dependence on traditional service line (i e application development & maintenance services) has come down from 58 per cent of the revenues in 2005-06 to 49 per cent in nine months 2007-08. The diversification is expected to benefit TCS, as non-traditional service lines are expected to grow at a CAGR of 30 per cent over the period of FY06 – FY11P, compared with a 20 per cent CAGR in traditional service line.
The value of deals in pipeline in final stage of negotiations at the end of October-December 2007-08 is 2.5 times the deal pipeline at the end of October-December 2006-07. Whereas, the number of large deals ($50 million plus) in pipeline is 30 as compared with 19 deals at the end of October-December 2006-07.
Increase in offshore component in the revenue mix and leverage of selling, general and administration expenses, will help it in moderating the impact of wage inflation, going forward. Whereas, impact of INR appreciation on margins, is expected to be reduced by its foreign exchange hedging policy.
Asit C Mehta expects TCS’s revenue to grow at a CAGR of 24 per cent over the period of FY07 – FY10E, considering the strong deal pipeline and high growth in emerging markets. Whereas, net profit is expected to grow at a CAGR of 15.2 per cent over the same period, considering the impact of completion of STPI scheme in 2008-09.
At the market price of Rs. 880 the stock trades at PER of 14.8x and 13.4x its FY09E and FY10E EPS of Rs 59.3 and Rs 65.8 respectively. Considering the trend towards gradual offshore shift in IT budget allocation and TCS’s positioning as a leading offshore player, Asit C Mehta has recommended buy rating on the stock.