Edelweiss Research has come out with pre earnings report on Tata Consultancy Services. It has recommended buy rating on the stock.

Expected numbers

Edelweiss expects Tata Consultancy Services, TCS to close Q4FY07 with revenue of INR 51.4 billion, a Q-o-Q growth of 5.8%, and net profit of INR 12.2 billion, a Q-o-Q growth of 10.2%.

Improvement in billing rates allied with strong volume growth

TCS, over the recent past, has become aggressive in demanding higher and better billing rates. The company indicates that it commands a heady 5-10% increase in billing rate from new clients. Combined with robust volume growth (onsite and offshore) we believe that margins are likely to be significantly higher (at least 150bps upwards) than the levels registered in Q3FY07. Our expectations of much improved margins substantially result from improvement in gross margins, which we see as a positive.

Strong quarter for the domestic consultancy business

We expect Q4FY07 to be strongest quarter for the domestic consultancy business, accounting for over 40% of the annual expected contribution of about INR 6.3 billion from this service line. New reporting metrics to improve the quality of viewing progress for investors at large Beginning this quarter, TCS will publish a separate ‘Operational Results’ sheet along with its financial results. The sheet will comprise a list of its on-going projects, benchmarked against 6-7 parameters.

They will include details about whether the project was completed on time or not, whether it met with quality expectations, and whether the project cost was within the mentioned budget. The move is an extraction of the company’s “Delivery 25” dashboard strategy which comprises 25 different parameters to measure execution performance for clients.

One-time gain in Q4FY07

TCS announced that it has recently concluded an agreement to transfer the ownership of TCS’ 40% stake in SITEL India to Sitel Corporation for a consideration of USD 17.7 million. We have not factored this gain in our estimates of adjusted net profits for the quarter.

Valuations

At a CMP of INR 1,189, the stock currently trades at a P/E of 21.1x and 16.8x and EV/EBITDA of 16.4x and 12.1x for our FY08E and FY09E, respectively. We retain buy recommendation.

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