TCS market value: is their room for growth?

Equity shares of Tata Consultancy Services (TCS) opened on a strong note on Friday after the company posted healthy numbers for the quarter ended 30 June 2014.

The stock hit a high of Rs2,485, up 4.32 per cent on Friday intra-day trades, before closing at Rs2,445 on profit booking. The July futures of TCS closed at a discount at Rs2408 as underlying shares contain an interim dividend of Rs40 per share.  

Profit booking by investors seems to be logical as the stock had almost achieved its target price of Rs2,500 assigned by most brokerages for the financial year ending 31 March 2015 (FY15). However, TCS has been on the "buy" list ranging between Rs2,500 and Rs2,760 in FY2015.

Analysts at JP Morgan Research think TCS's valuation looks a tad punchy in the near term at 20-21times its forward price to earnings ration, but we see it as a core strategic holding in portfolios as gains from leadership are compounded over time.

JP Morgan analysts retain their neutral rating on TCS with a 31 March 2015 price target of Rs2,500 (up from Rs2,400). The modest increase in the price target is due to higher-than-expected growth and margins. Their exchange rate assumption is Rs60 to the dollar for the next seven quarters (2QFY15 to 4QFY16).

Kotak Securities has put a price target of Rs2,519 as analysts expect FY15 dollar revenues to grow by 16.6 per cent, led by volumes. For FY16, they expect a revenue growth of 12.8 per cent. Margins are expected to reduce by about 100bps to 28.1 per cent in FY15 and FY16. Salary increases and investments in sales / marketing are expected to impact profitability. With taxes expected at around 24 per cent, profit is expected to rise by about 14 per cent in FY15 and 13 per cent in FY16.

Angel Broking has put TCS on the "buy" list with a target price of Rs2,760. The buy recommendation has been supported by the growth prospects given by the management for FY15. Angel Broking expects the company's revenue to grow at a CAGR of 14.6 per cent in dollar terms and 14.4 [er cent in rupee terms over FY2014-16E.

The management reiteration of the FY2015 to be better than FY2014 has been on the back of a strong deal pipeline and budget indications from clients. The current deal pipeline presents opportunities for a robust growth in both run-the-business (RTB) and discretionary activities.

Analyst at Religare Research have increased the target price for TCS from Rs2,450 to Rs2,600 after upgrading its FY15 and FY16 earnings per share (EPS) estimate by 2%/2.3%.

Analyst at Sharekhan Research have put buy rating with a target price of Rs2,684. TCS's scale of operations are strongly placed  to face headwinds as compared to its peers. The company's optimism over the demand environment stems from digital technologies, spending on simplification of operations by clients and spending on compliance and regulatory initiatives.

Motilal Oswal Securities have put a target price of Rs2,600, but with some concern over margins.  In the past 10 quarters TCS' utilisation, including trainees, has increased by 850bps.

2QFY15 will witness headwinds from the merger of its Japanese entity, which as per our estimate will have a 65bps impact. Also, there will be a slight impact from promotions that will be effective in 2QFY15 for the company. Hence, analysts expect EBIT margin closer to 27 per cent at current currency levels at the higher end.

Earnings per share (EPS)
Anaysts' estimates
TP (Rs)*
FY14
FY15E
FY16E
Angel Broking
2760
97.6
112.6
125.4
Barclays
2730
97.6
117.0
136.5
Emkay
2600
97.6
110.4
125.4
J M Financial
2550
97.6
113.1
127.7
JP Morgan
2500
97.6
112.0
130.6
Kotak Securities
2519
97.6
111.6
125.4
Motilal Oswal
2600
97.6
110.5
127.5
Prabhudas Lilldher
2680
97.6
116.0
133.3
Reliage Securities
2600
97.6
110.0
128.1
Sharekhan
2684
97.6
111.7
122.7
* TP; target price for FY15