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Tata Consultancy Services TCS Results update

TCS Results update. TCS’ 1QFY10 performance exceeded consensus expectations on all counts. Revenues at US$1480 mn grew 3.3% qoq and were 3.6% higher than we expected. Volumes grew 3.5% qoq while pricing dipped 0.25%. Revenue growth was led by strong gains in the BFSI vertical, which grew 5.1% qoq. TCS management has cited BFSI, retail, utilities and life sciences verticals as the potential growth drivers.

Some number crunching:

EBIT margin increased 113 bps qoq to 24.8% led by 1) strong shift in revenues offshore contributing 95 bps to margins; (2) SG&A expenses declined 93 bps qoq. Benefit of the above factors was somewhat offset by weaker pricing (34 bps) and currency (41 bps).

Receivables collection cycle reduced further to 93 days versus 95 in 4QFY09 and 105 in 1QFY09. TCS had placed special emphasis in reducing credit cycle to weaker clients. TCS’ receivables days are still higher than peers like Infosys, Wipro and Cognizant.

FY2010E EPS is expected to inrcrease by 13% to Rs30.5 and FY2011E EPS by 14% to Rs33.8. FY2011E EPS builds in benefit from extension of STPI tax exemption by one year to end-FY2011. TCS’ tax rates in FY2012E may jump to 21% from 17.7% in FY2011E. On the back of these estimates, the FY2011E DCF based target price works out to Rs550. So long term investors can utilize any declines to buy TCS with a price targe of Rs.550.