HSBC on TCS

HSBC values TCS at a P/E of 21x the calendarised ‘11 EPS and maintains its 12-month target price of Rs 890. HSBC remains confident of 20% US dollar revenue growth in FY11, with margins little changed. It expects growth in telecom, ERP (enterprise resource planning) and remote/infrastructure management services (RMS) to accelerate in FY11. IT spend in the telecom sector is likely to be driven by strong capex by telecom service providers, while ERP (SAP) market recovery should be led by upgrades and new mega ERP deals. Growth in manufacturing should be driven by a revival in the SAP market and further traction in remote management services. Banking (BFSI) is likely to remain strong as banks continue to spend on new engagement models for customers and offshore to cut costs further. The management is confident of maintaining margins in FY11. HSBC sees margin headwind of 120-150 bps in FY11, assuming a 10% average wage increase for employees with more than three years of experience. Offsetting this margin pressure, the broadening of the employee pyramid and the increase in offshore revenues provide estimated margin benefits of 60+ bps and about 75+ bps respectively. TCS is trading at a modest 9% discount to Infosys on FY11E EPS.