IT in 2013, Analysts upbeat on TCS

 In the week after the optimistic management commentary, the TCS stock has gained 5%, beating the sector index BSE IT, which earned a little less than 3%. Following the management's iteration of stable billing rates and sustained demand scenario right through the next few quarters, some of the analysts have reaffirmed their buy rating on the stock.

Considering its strong presence in the global outsourcing business, the company is expected to outperform the benchmarks and sector indices in the coming year as it did in 2012. In a recent analyst call, TCS's management said that it has so far not witnessed major project cancellations. A report from the equity research wing of Barclays noted that the management has cited a strong pipeline, rise in deal wins and positive client discussions on discretionary spending.
Budgets on discretionary projects or work that tends to add value to a business faced weakness in the last few quarters. In the coming quarters, the extent of IT budgets by the US and European clients, which are chalked out by the first quarter of every year, will play a crucial role. In a recent report, independent research firm Gartner expected a 2.5% improvement in IT enterprise spending globally. Sectors, including banking & finance and transportation & insurance, are expected to grow in 2013 at a healthy rate of 3.5% and 4%, respectively. This augurs well for TCS which earns nearly half of the revenue from these verticals.

However, due to seasonal factors, the company's business volume in the December 2012 quarter is likely to be lower than over 5% in the past two quarters. This would also impact operating margin for the quarter. The company has targeted 27% margin for FY13. Some analysts believe that the weakness in the stock in the past month is an overreaction to market conditions and investors can use the fall in price as an entry point.

The stock trades at a price earnings ratio of 19, based on earnings for the 12 months to September 2012. Its net profit grew 33%, 24%, and 32% in the previous three quarters to September 2012. Assuming a conservative net profit growth forecast of 20% in the next two years, the forward P/E works out to be 15.9 and 13.2 for FY13 and FY14. This looks cheaper considering that in the past, the stock had traded at forward P/E closer to 20.