Tata Consultancy
Outlook
While near-term demand for the top tier vendors is intact, uncertain global macroeconomic outlook could weigh on the CY12E IT budgets of clients. This, in our view, will only accelerate the need to cut costs and hence Indian IT services companies should benefit from the increase in offshoring by clients. We expect TCS, India's largest offshore services provider, to be the key beneficiary of clients’ increased focus on using offshore delivery. For FY13, we forecast earnings to grow 13% in rupee EPS. We believe our target PE of 20x FY13E is fair given an earnings CAGR of 18% over FY12-14E. The company has an estimated long-term earnings growth potential of at least 15-20% given a likely increase in focus on cost control and outsourcing in developed economies. As such, we rate TCS a Buy and name it our top pick.
Valuation
We value Indian IT services firms on a PE basis, relative to their historical trading range, compared to peers as well as growth rates. We value TCS at a revised target PE of 20x FY13E (vs. 25xFY12E/06 earlier) to factor in its consistent outperformance over Infosys on both revenues and profits. Though our target PE multiple is at a PEG of 1.1, we believe this adequately factors in the downside potential from growing global macroeconomic concerns. On a one-year forward basis, TCS currently trades at a 10% premium to Infosys and we believe this will likely continue in the short term.
Outlook
While near-term demand for the top tier vendors is intact, uncertain global macroeconomic outlook could weigh on the CY12E IT budgets of clients. This, in our view, will only accelerate the need to cut costs and hence Indian IT services companies should benefit from the increase in offshoring by clients. We expect TCS, India's largest offshore services provider, to be the key beneficiary of clients’ increased focus on using offshore delivery. For FY13, we forecast earnings to grow 13% in rupee EPS. We believe our target PE of 20x FY13E is fair given an earnings CAGR of 18% over FY12-14E. The company has an estimated long-term earnings growth potential of at least 15-20% given a likely increase in focus on cost control and outsourcing in developed economies. As such, we rate TCS a Buy and name it our top pick.
Valuation
We value Indian IT services firms on a PE basis, relative to their historical trading range, compared to peers as well as growth rates. We value TCS at a revised target PE of 20x FY13E (vs. 25xFY12E/06 earlier) to factor in its consistent outperformance over Infosys on both revenues and profits. Though our target PE multiple is at a PEG of 1.1, we believe this adequately factors in the downside potential from growing global macroeconomic concerns. On a one-year forward basis, TCS currently trades at a 10% premium to Infosys and we believe this will likely continue in the short term.
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