Seek safety in TCS (Buy)

Large-cap stocks and companies with a stable earnings outlook appear to be a good choice in choppy markets of today. Software major TCS meets both criteria and is a good option for investors with a one-two year horizon. The stock is also a good hedge against the prospect of a weak rupee. Growth across its key verticals, steady increase in large customer additions and robust performance in parameters such as volumes and utilisation, are in favour of TCS. At Rs 1,541, the share trades at 18 times its likely per share earnings for FY14. This means the TCS stock is not cheap compared to the broader markets. In the first nine months of this fiscal, the company’s revenues rose by 31.5 per cent over the same period last year to Rs 47295 crore, while net profits increased by 37 per cent to Rs 10,302 crore.

TCS’ growth, especially on volumes (person-months billed) and revenues over the past 8-12 quarters has been much ahead of the industry and also higher than peers such as Infosys, TCS and at times even more than HCL Technologies. As a large software services provider, TCS has increasingly been focussed on being a full services provider rather than taking up deals that requires it to deliver only a part of its offerings. This strategy has led to larger deal wins and has helped it ramp up revenues from existing clients significantly.

In the last one year, the number of clients in the $100 million category increased by two to 16, while the number of customers in the $50 million bucket increased by 8 to 47. Nielsen company with which TCS had signed a $ 1 billion deal a few years back, increased the size to $2.5 billion recently and also increased the tenure of the deal which clearly indicates the company’s ability to mine its existing clients well. All key verticals of the company such as BFSI, Manufacturing and Retail & Distribution have been growing at or faster than the overall company’s revenue rate. Key geographies such as the Americas and the UK continue to grow. The company’s utilisation rate, at 81.7 per cent, is the highest compared to large-sized peers, and is among the highest in the industry. This level clearly indicates that the company has sufficient visibility on volumes and revenues. Attrition, at 11.2 per cent, is the lowest among peers. Any pricing pressure in the event of economic deterioration in developed markets may threaten margins.

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