We rate Tata Consultancy Services Limited (TCS) a 'BUY'. Our rating underpins the company's leading position in the Indian IT space, strong growth in business volumes, GNDMTM for better catering of customers' needs, non linear growth drivers, strong R&D, and its history of rewarding shareholders. However, a dull European business environment and currency headwinds impede our optimism a bit.
We adopted a comparable valuation method to value TCS based on Price-to-Earnings (P/E) multiples. Historically, the company traded on a five year average P/E multiple of 24.2x. This reveals a discount to the peer group average P/E of 25.4x for the same period. In the longer run, we expect the company to trade at a premium over the peer group average P/E based on its outperformance.
With this, we anticipate the P/E gap, of TCS and Industry to stand at 0.5x in subsequent years. As a result, to arrive at a target P/E multiple for TCS we applied a 19% discount to five year average P/E of peer group. Adding the premium, this resulted in a targeted P/E multiple of 21.1x for the company, which on FY2013E EPS of `65.88, reflects a target price of Rs 1,388.70, inclusive of dividend payments, for the stock.
Our target price translates a 22.2% upside over TCS' current stock price. On an annualized basis, this translates into returns of 12.7%. Following table represents the sensitivity of our target price to variation of target PE multiples and EPS levels
We adopted a comparable valuation method to value TCS based on Price-to-Earnings (P/E) multiples. Historically, the company traded on a five year average P/E multiple of 24.2x. This reveals a discount to the peer group average P/E of 25.4x for the same period. In the longer run, we expect the company to trade at a premium over the peer group average P/E based on its outperformance.
With this, we anticipate the P/E gap, of TCS and Industry to stand at 0.5x in subsequent years. As a result, to arrive at a target P/E multiple for TCS we applied a 19% discount to five year average P/E of peer group. Adding the premium, this resulted in a targeted P/E multiple of 21.1x for the company, which on FY2013E EPS of `65.88, reflects a target price of Rs 1,388.70, inclusive of dividend payments, for the stock.
Our target price translates a 22.2% upside over TCS' current stock price. On an annualized basis, this translates into returns of 12.7%. Following table represents the sensitivity of our target price to variation of target PE multiples and EPS levels
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