Tata Consultancy Services Ltd.'s (TCS) revenues in Q4 FY08 increased by 3% sequentially, to Rs.60, 978 mn from Rs. 59, 229 mn. IT & Consultancy business reported a sequential growth of 4.4%, whereas Manufacturing, Sale of Equipment & License business witnessed a de-growth of 19.9% Q-o-Q.
Operating margin saw a sequential decline of 80 bps in Q4 FY08, as expected project ramp up didn't materialize while continuation of expansion activities resulted in higher costs. As a result operating profit during Q4 FY08 remained unchanged sequentially, at Rs15860.9 mn. In the cases where projects were delayed, the company expects a ramp-up to start from the middle of Q1 FY08, based on its discussion with the clients.
During Q4 FY08, the net profit declined by 6.2% (Q-o-Q) to Rs.12448.3 mn, led by rise in tax rate (15.3% in Q4 FY08 against 13% in Q3 FY08), forex loss on account of INR depreciation against USD and a equential increase in depreciation by 10.8% due to expansion activities of the company.
Outlook and Valuation
Considering strong deal pipeline, large deal wins in Q4 FY08 and management's hiring plans for FY09, we are maintaining our forecast in respect of volume growth for FY09 and FY10. However, we are lowering our billing rate estimates, considering upfront discount provided by TCS in form of free transition in ecently won large deals, indicating pricing pressure in case of large deals. Also, we are changing our estimates in respect of average exchange rate to Rs. 39 and Rs. 37.8 per USD for FY09 and FY10, from our previous estimates of Rs.38.6 and Rs.37.5 per USD for FY09 and FY10, respectively. Further, considering the extension of STPI scheme upto FY10, we are reducing the tax rate for FY10 to 15% from 22% expected earlier.
Taking into account above said, we are reducing our FY09 revenue estimates marginally by 0.5% and net profit estimates by 4.4%. However lower expectations of billing rate and reduction in tax rate assumption due to extension of STPI scheme has resulted in increase of 6.9% in our EPS estimates for FY10. Due to increased uncertainty related to project ramp ups by BFSI clients, we are reducing the target P/E multiple from 16x to 15x and revising our target price to Rs.1059 (15x FY10E EPS of Rs.70.6) from Rs.1053 (16x our previous FY10E EPS of Rs.65.8).
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