TCS.

TCS (CMP: Rs1326)

Mkt Cap: Rs1,298bn; US$29.3bn

TCS reported 7.9% qoq volume growth, exactly in line with our expectations, but the billing rate increase of 2% qoq was above our forecast. The productivity improvement on fixed price contracts wasn't built into our forecasts. Though, gross margin expansion was in line, the SG&A cost containment led to higher EBITDA margin expansion of 90bp compared to our forecast of 30bp. The company announced 5 large deals between $70-140m across 5 continents and spoke of pursuing another 10 deals each in excess of US$50m. The company seems confident to show further improvement in margins due to financial prudence and productivity improvements. Also, it reiterated that contract renewals are occurring at 3-5% higher billing rates and that new contracts are being signed at 5-10% higher than average rates. Overall, the results beat our expectations largely due to the productivity improvements on fixed price contracts. We have raised our earnings forecasts by 4.3%, 7.1% and 10.4% for FY07E, FY08E and FY09E respectively. The stock price is already up by 8.5% YTD in anticipation of the strong performance. Given that the company delivered on its promise, at 23.3x FY08E and 19.1x FY09E earnings we maintain Out performer with a raised target price of Rs1,635 (earlier Rs1,512).