The meltdown in the global Financial Sector and subsequent global recession led to hitherto-reputed institutions going bankrupt, getting taken over or bailed out.
In an unprecedented move, the US through to 30 April, made commitments of over $12trillion to support the Financial System.
In the ’Stress Test’ conducted by the US to assess its banks’ capital requirements in the event of a ’worst case scenario’ materialising for the economy, the findings showed that banks require to raise $74.6 billion in extra capital to cushion themselves from the fall-out of such a scenario.
Thus, the worst appears to be behind us and going forward, the BFSI Sector should gradually recover, which will be a key positive for TCS, given its significant exposure to this space (over 42% of FY2009 consolidated revenues).
The Obama Administration, in its attempt to ensure job creation in the US, had alluded to giving preference to companies that ”create jobs in Buffalo over Bangalore”, a statement that has led to concerns over the future of outsourcing.
However, we believe these concerns are overdone and rather than preventing corporations from offshoring, it attempts to prevent global US corporations from tax evasion through limiting the tax deferral. We remain positive on the long-term prospects of the Indian IT Sector.
Post 4QFY2009 results, TCS’ stock has risen 10% as compared with 24% for Wipro. Wipro now trades at 13.8x FY2010E EPS.
Infosys on the other hand, trades at 15.5x FY2010E EPS while TCS trades at 12x FY2010E EPS, a significant 23% discount to Infosys and a 13% discount to Wipro.
We believe, given the relative size and quality of businesses, top quality managements and high RoEs for all companies, such a discount in relative valuations is not justified.
Historically, TCS has traded at around 5-10% discount to Infosys. Consequently, we believe the stock deserves a re-rating.
We upgrade TCS to BUY from Neutral with a target price of Rs726, assigning a target P/E of 14x FY2010E EPS.