Stock Pick from IT Consulting & Software Sector

HERE IS WHY

• Strong performance on USD revenue growth and volume growth front.
• Margins are expected to improve due to business portfolio mix and operational effi ciency.
• TCS being the largest player will be the first to benefit from improved global market environment.

This issue’s choice scrip is India’s largest Indian exporter in the IT segment, Tata Consultancy Services (TCS), which became the first company to cross market capitalisation of Rs.  5 lakh crore. A noticeable factor is that if we consider the market cap of TCS, it is even more than the combined market capitalisation of the next four companies like Infosys, Wipro, HCL Technologies and Tech Mahindra. TCS offers a consulting-led, integrated portfolio of IT, BPS, infrastructure, engineering and assurance services. Being a part of the Tata Group, India’s largest industrial conglomerate, TCS has over 3,05,000 of the world’s best-trained consultants in 46 countries.The primary reason behind our recommendation is its strong financial performance in the June 2014 quarter. The company registered USD revenue growth of 5.5 per cent on a sequential basis which was the highest in the last 12 quarters. Further, the company registered robust volume growth at 5.7 per cent during the said quarter. Robust volumes and healthy growth across all industries and key markets helped TCS start the new financial year on a strong note.

Interestingly, during the June 2014 quarter, TCS posted the highest incremental revenue of USD 191 million in the last 15 quarters driven by holistic growth across markets led by North America along with Asia-Pacific, India, United Kingdom, and Europe. Growth was seen across all industry segments led by media & information services, life sciences, retail and telecom with all non-BFS verticals growing in excess of 5 per cent sequentially.

TCS faced a number of margin headwinds such as wage hike, currency appreciation, and one-time depreciation charge during the June 2014 quarter. However, margins are expected to improve in the near future due to improved business mix (higher revenue contribution from digital), non‐recurring depreciation charge, and improved productivity. Further, the management is confident that TCS will continue to maintain its operating margins in its desired band by operating efficiently. The management is also confident of delivering stronger than FY14 results with its broad-based business portfolio that continues to deliver results. The company has a strong demand pipeline in place and its customer-centric mindset, leadership in the digital space and strong execution capabilities will help it to sustain its momentum.

On the market environment front, the IT spending is continuing to show improvement with the US expecting to spend more on new projects. On the global front too, worldwide IT spending is expected to increase by more than 2 per cent on a yearly basis. Further, this enables Indian large IT service companies to expand much faster than the overall market as these companies continue to gain market share in the worldwide IT spending market. On the valuations front, the stock is available at price-to-earning multiple of 26x. We advise investors to enter the counter with a one-year price target of Rs. 3,100.