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					Tata Consultancy Services
Abhiram Eleswarapu (91 22) 6628 2406
S O W H A T ?


India Technology/Software & Services

Change in Recommendation 30 September 2008




Target Price ..... INR580.00 ..........................(From INR880.00) Diff from Consensus(43.7%) Consensus (median) .INR1,030.00 Consensus (momentum) .......... Current Price .... INR676.20 Upside/(Downside)........... (14.2%)

O U T L O O K :

We have one of only four REDUCE calls on the Street. FY09 USD revenue growth of 16.2% y-y among the lowest on the Street. TP 44% below Street.

Net Profit 09 .......INR57.5b ...........................(From INR58.9b) Diff from Consensus..(1.8%) Consensus (mean) ........INR58.6b Consensus (momentum) ..........

(From Hold)
Recs in the Market Positive ......................................20 Neutral .........................................5 Negative ......................................4 Consensus (momentum) ..........

Sources: Thomson One Analytics; Bloomberg; BNP Paribas estimates

• Extensive checks suggest effect of worsening environment will start in 3QFY09; highest risk to estimates for TCS. • Cutting TCS to REDUCE from HOLD, and FY09E and FY10E EPS by 2.4% and 4.8% despite weaker INR assumptions. • TP: INR580 based on 0.72x FY08-10E PEG (one SD below historical mean), translates to FY09E P/E of 9.9x.

More negative triggers likely: REDUCE
Downgrading TCS to REDUCE, sector view to NEGATIVE We are downgrading TCS to REDUCE from HOLD and our sector view to NEGATIVE from POSITIVE. This follows several weeks of checks with about 40 industry contacts across IT companies. Cautious optimism is fast turning into worries over reduced revenue visibility over the coming quarters. New projects are drying up, especially from financial services clients, and will likely be followed by retail and consumer discretionary clients. We expect the first effect to hit in 3Q, a traditionally strong quarter. We believe that TCS faces the highest risk to internal targets and consensus estimates, and Infosys the least. Why REDUCE on TCS? Our REDUCE call on TCS is based on our checks that indicate: 1) a high risk to internal targets and a less-secure deal pipeline than previously believed. Consensus projections of 10.8% q-q average EPS growth for the next three quarters – which are the highest in the peer group – look aggressive, even with help from the weak INR; 2) 43% revenue exposure to financials is a growing concern; what started off as specific accounts slowing is likely to spread to others less in the news than Lehman, Merrill, Lloyds TSB and HBOS; 3) the new vertical-based organization structure has only settled and has cost TCS opportunities through 1HFY09. Cutting estimates and TP We cut our target price by 34% and FY09E and FY10E USD revenue by 1.6% and 6.3%, respectively. We do not expect big cuts in hiring, but see pricing and utilization levels under pressure, leading to a y-y FY09E EBIT margin decline of 59bp, despite a depreciating USD/INR. Not too late to REDUCE positions or switch to Infosys While the valuation at 11.5x FY09E P/E looks inexpensive, consensus’ cuts are yet to come. TCS has also had successive quarter misses, and another one could lead to further valuation re-rating. We see a choppy few months ahead for IT stocks (Infosys maintaining USD guidance could be seen as a sector positive) that will provide opportunities to cut positions. We recommend investors switch to Infosys.

Abhiram Eleswarapu (91 22) 6628 2406
BNP Paribas Securities India Pvt Ltd

Avinash Singh (91 22) 6628 2407 BNP Paribas Securities India Pvt Ltd
Earnings Estimates And Valuation Ratios
YE Mar (INR m) Revenue Reported net profit Recurring net profit Previous rec net profit Chg from previous (%) Recurring EPS (INR) Prev rec EPS (INR) Rec EPS growth (%) Recurring P/E (x) Dividend yield (%) EV/EBITDA (x) Price/book (x) ROE (%) Net debt/equity (%) 2008 50,191 50,191 50,191 — 51.29 51.29 21.5 13.2 2.1 11.2 5.3 46.8 (3.3) 2009E 57,497 57,497 58,941 (2.4) 58.75 60.23 14.6 11.5 2.6 9.2 4.0 39.9 (5.2) 2010E 64,829 64,829 68,126 (4.8) 66.25 69.62 12.8 10.2 3.0 7.7 3.2 35.1 (18.5) 2011E 70,529 70,529 74,898 (5.8) 72.07 76.54 8.8 9.4 3.3 6.6 2.6 30.9 (26.4) 228,158 291,352 343,308 388,007

Sources: Tata Consultancy Services; BNP Paribas estimates

Share Price Daily vs MSCI

Tata Consultancy Services (INR) (%) Rel to MSCI India 1,200 10 1,100 0 1,000 (10) 900 (20) 800 (30) 700 600 (40) Sep-07 Dec-07 Mar-08 Jun-08 Sep-08
Next results/event Market cap (USD m) 12m avg daily turnover (USD m) Free float (%) Major shareholder 12m high/low (INR) ADR (USD) Avg daily turnover (USD m) Discount/premium (%) Disc/premium vs 52-wk avg (%)
Source: Datastream

October 2008 14,224 31.5 19 Tata Sons (75%) 1,125.50/676.20 Nil Nil Nil Nil

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Recommendation structure

All share prices are as at market close on 26 September 2009 unless otherwise stated. Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. *In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. © 2008 BNP Paribas Group




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