TCS came out with impressive numbers for the first quarter of FY10. The
company managed to beat the market expectations. There was a surprise
surge in the profits at the operational levels as the company saw the benefits
from the improved cost management measures undertaken in the previous
months and increased off-shoring in Q1FY10 accrue at the EBITDA levels. Also,
the company saw higher non-operating income push the bottom line further
up. Q1FY10 volume growth stood at 3.54%. The management reiterated the
cautious outlook for the overall business environment. Though the pricing
pressures seem to be reducing, the environment continues to be challenging.
The management believes that the sector can see business recovery only post
the end of 2010. However, as far as the current fiscal year is considered, TCS
expects a flattish growth, as the management is cautiously optimistic about
the growth opportunities. The macro economic uncertainties are expected to
impact on the industry verticals like manufacturing, high-tech and telecom,
which would be prime culprits in dragging down the growth for the next
quarter. In coming quarters, the fresh hiring plans would be impacting the
operating profits. At the client level, the IT spending pattern is yet not clear
owing to the adverse macro environment, which is further engraved by the
prolonged decision making cycle at the clients’ end. Though there are signs of
green shots, one cannot construe it as return of the spring. There is some
more pain left for the IT players before they resume their prosperous journey.
With this we maintain a cautious view on this sector. At the CMP of Rs. 501,
the stock quotes at PE of 17.62x its FY10E EPS of Rs. 28.41. Hold.