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| Summary of Contents | STOCK UPDATE Tata Consultancy Services
Recommendation: Buy
Price target: Rs3,100
Current market price: Rs2,451 Concerns overdone, maintain Buy Key points - In its quarterly interaction with the analyst community, the management of Tata Consultancy Services (TCS) stated that owing to seasonal weakness on account of furlough, Q3FY2015 expects to be a soft quarter. Further, on an account of cross-currency headwinds, there will be a negative impact of 220BPS on the reported USD revenues. However, there will be some gains from the depreciation of rupee against dollar during the quarter, and the net currency impact will be close to negative 20BPS on reported revenues. The contribution of Mitsubishi JV will be around JPY 14-15 million, though on USD terms the reported revenues will be higher at around $120 million as compared with $103 million in Q2FY2015. Overall, owing to its significant cross-currency headwinds coupled with some deferrals in revenues booking, the management expects the organic revenues growth in FY2015 would be lower than FY2014 (16.2%), though it expects to be higher including Mitsubishi JV.
- The EBIT margin is expected to remain stable with an upward bias, expect 10-20BPS positive improvement in margins in Q3FY2015. The management maintained a margin corridor of 26-28% for FY2015. On the employee involuntary attrition front, the management stated that it will be a routine exercise and is committed to hire more than 55,000 headcount in FY2015 and 35,000 trainee headcounts in FY2016. The other income is expected to be higher than Q2FY2015 on account of higher forex gains, for Q2FY2015 the total other income was at Rs565.9 crore.
- Though, we do not see any major departure in the management's commentary as compared with Q2FY2015, yet the management has acknowledged a dip in the revenues predictability owing to its cross-currency headwinds and some deferrals in projects in the earlier quarters. In FY2016, the demand outlook will gain more clarity by January or February 2016 with regards to clients' budget spends. Sensing some growth contraction in FY2015 as against expectations, TCS stock has already underperformed the broader market indices and IT index in the last three months. At the current market price of Rs2,451, the stock trades at 19x and 17x of FY2016E and FY2017E earnings. We continue to remain positive on TCS and believe that the current weakness in the stock is a good opportunity to buy for an investment horizon of 12 months. We maintain our Buy rating on the stock with a price target of Rs3,100.
VIEWPOINT Welspun India
Current market price: Rs340
View: Positive Home textile leader; available at an attractive valuation Key points - Welspun India: Leader in the home textile space: Welspun India (Welspun) is a focused export-oriented home textile player with a widest range of products in the home textile segment. It is the leading player with 14% market share (towel segment) and 9% market share (cotton sheets) in the USA. The company has a wide array of marquee global clients ranging from Wal-Mart, Bed Bath and Beyound, Macy's , JC Penny, Tesco, Asda Stores and also has its presence in India through its own brand called Spaces and Well Home. Innovative and value added products accounts for around 25% of the company's revenue which fetch higher margins. The company is diversifying its geographical as well as customer mix, and over the years has succeeded in the same. In FY2010, USA constituted around 73% of its sales, which has now reduced to 60%, while the top five clients in FY2010 constituted around 53% of the sales that has reduced to 41% in FY2014.
- Indian home textile in a sweet spot and Welspun is all set to cash in the same: India is strongly emerging as a preferred manufacturing base for the global players and moreso in categories of home textile and home furnishing owing to the structural advantages that the country enjoys (low labour cost and net raw material (cotton) exporter to the world). Over the years, India's share in the US market has improved (in towels from 30% in 2009 to 36% in 2013, while in cotton sheets from 27% in 2009 to 47% in 2013). Despite an improvement in the market share and the overall growth in the categories, India's overall market share still remains at 11% in the global home textile arena, (China is a leader with an overall home textile market share at 35%), that provides strong leg room for growth for the Indian players, and Welspun by virtue of being a leader in the segment with established client relationship and the manufacturing base would be the key beneficiary of its structural improvement.
- Strong growth witnessed; with new capacity upstream growth trend likely to continue: Over the last three years, the revenue has grown at a CAGR of 24%, while EBITDA and earnings have grown at a CAGR of 31% and 45% respectively. The company has recently completed the backward integration and debottlenecking exercise that entailed an investment of Rs1200 crore. Further, it has planned a capital expenditure of Rs1300 crore to be deployed over the next two years time frame. Thus, with the improving demand environment, along with increased capacity and the backward integration, Welspun is expected to show robust revenue growth along with slight margin improvement. It is expected that the company is likely to post revenue and earnings CAGR of 18% and 19% over the next three years respectively.
- Industry leader with strong growth potential and decent returns available at an attractive valuation: Despite being an industry leader in a high growth home textile segment that is expected to witness a robust growth (owing to improvement in the share in the USA and the European home textile market) with an improvement in the margins and returns, the company is trading at 7.3x its FY2015 earnings and less than 6x its FY2016 earnings (of our rough cut estimates) which is attractive, and thus believe the stock to provide decent appreciation from the current levels, on a long-term basis, while on the short- to medium-term perspective we expect it to deliver over 22-25% returns in the next six to nine months.
| | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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