Prabhudas Lilladher Q4FY15 report for Tata Consultancy Services
Prabhudas Lilladher Private Ltd has issued the following Q4FY15 report for Tata Consultancy Services:
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Revenue soft, Margin ahead; Commentary strong
Tata Consultancy Services (TCS) Q4FY15 results were mixed bag. Revenue was below PLe/Consensus expectation, but, margin (after adjusting for employee bonus of $423m) was ahead of expectation. TCS missed expectations in five out of last six quarters. The weakness was attributed to disappointment in Telecom, Insurance and Energy. Management continues to hold its positive view on demand environment and IT budget. We expect near-term weakness in stock price as consensus expectations moderate.
Tepid performance – Revenue soft, margin ahead: Revenue declined by 1.1% (+1.6% @cc) QoQ to Rs242.2bn (PLe: Rs244.6bn; Cons: Rs245.4bn) and -0.8% QoQ in USD terms to $3,900m (PLe: US$3,939m, Cons.: US$3,951m). EBIT margins (adj.) expanded by 18bps (PLe: -35bps, Cons: -38bps) to 27.2%, driven by offshore shift and operational efficiency. EPS (adj.) grew by 8.5% QoQ to Rs30.16 (PLe: Rs27.21, Cons: Rs27.53).
What resulted in another negative surprise?: Q4FY15 negative surprise was driven by cross-currency movement (Actual: 250bp, PLe: 230bp) and weakness in Energy, Telecom and Insurance vertical. Q4FY15 performance was softer than Management’s expectation along with negative surprise for moderated consensus’ expectation.
Digital, and Artificial Intelligence – Next growth driver: TCS drives $125m (+55% YoY) revenue from Digital. Management expects momentum to stay strong in Digital driven by BFS and Retail vertical. TCS has launched an AI-based IT and business automation platform. It will yield productivity gain through automation and self learning for IT, IMS and BPM.
Positive commentary on IT Budget, Deal Pipeline, and Discretionary: Management reiterated their view on healthy overall demand environment with positive bias for IT budget for their clients along with healthy deal pipeline. Moreover, Management expects return of discretionary spend for all verticals except three weak verticals, with acceleration in revenue momentum in BFS.
Valuation & Recommendation – Retain ‘BUY’ with revised TP of Rs2,980: We see continued moderation in street’s revenue expectation putting pressure in the near term. We expect TCS to grow in-line with NASSCOM’s guidance. Retain our “BUY” rating with TP of Rs2,980 (Old: Rs3,100), as we tweak our model.