TCS Update

Tata Consultancy Services
Research: Citigroup
Rating: Buy CMP:Rs 904

Tata Consultancy Services’ (TCS) third-quarter revenues of $1.5 billion were below the expectation of $1.53 billion, but net profit at Rs 1,330 crore was higher than the expectation of Rs 1,300 crore. The company’s EBIT margins were up 33 basis points (basis) q-o-q. Its revenue growth comprises 5.3% volume growth and 0.5% pricing increase q-o-q. TCS’ North American revenues increased 1% q-o-q. With a challenging macro-environment, this remains the key investor concern. Banking, financial services and insurance (BFSI) revenues increased 7% q-o-q — higher than the company average. BFSI revenues have grown better than the company average for both Infosys Technologies and TCS. TCS hired 8,000 employees in the quarter (lower than the indicated number of 9,000). However, the management maintained its earlier guidance for full-year hiring at 32,500 and indicated that budget discussions with clients do not indicate any weakness in demand. TCS is pursuing around 25 large deals. However, given the negative macro news, it continues to monitor its outlook and has a cautiously positive view on demand. The slowing US economy and its impact on demand for IT services continue to pose concerns for investors. Citigroup continues to believe that Tier-1s are better-placed. TCS stock trades at 15x FY09E.