Ambit Capital keeps SELL on TCS Ltd

Ambit Capital keeps SELL on TCS Ltd
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First Published: Mon, Jan 19 2009. 10 29 AM IST

Updated: Mon, Jan 19 2009. 10 29 AM IST
During Q3FY09, TCS reported revenues of Rs72.8 billion, a growth of 4.7% q-o-q and 22.9% y-o-y. The sequential growth in revenues (rupee terms) was driven by a 2.2% volume growth and 5.9% gains from rupee depreciation.
This increase was partially offset by decline in realizations (impact of 10bps), cross currency fluctuations (impact of 250bps), and lower revenues from offshore projects (impact of 160 bps).
The 5.8% sequential decline in revenues (USD terms), however, was higher compared to the 3.7% decline reported by Infosys during the quarter. TCS’ y-o-y USD revenues declined (by 1.3%) for the first time in the past several years.
In Q3FY09, the company reported an EBIDTA of Rs19.4 billion with EBIDTA margins expanding ~50bps sequentially to 26.7% during the quarter.
The gains from rupee depreciation (+136bps), reduction in SG&A expenses (+166bps), and offshore projects (+20bps), were taken away by losses arising from lower productivity (-126bps).
TCS reported a net profit of Rs13.6 billion during the period under review. The sequential growth, at 7.2%, was driven by lower costs and rupee gains. The Y-o-y growth in net profits, at 2.6%, remained muted due to foreign exchange losses of Rs2500mn.
Valuation
The Q3FY09 results were lackluster compared to Infosys’. We, however, remain particularly concerned on TCS’ inability to contain the volume and pricing pressures in the current economic scenario.
Despite being a specialist in handling fixed price projects (FPP), TCS reported a 120bps drop in utilization levels (compared to an increase of 80bps reported by Infosys).
Moreover, TCS’ ’top 10 client’ exposure to global BFSI sector is also not comforting. We have valued TCS at 8x its FY10E diluted EPS of Rs54.1 (at 20% discount to Infosys) and set a target price Rs430.
This implies a further downside of ~15% from current levels. We maintain our SELL rating on the stock.
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First Published: Mon, Jan 19 2009. 10 29 AM IST
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