Tata Consultancy Services Overweight
TCS.BO, TCS IN
Manufacturing vertical is visibly looking up, coming out
of a period of underperformance
We held a conference call with Mr. Milind Lakkad - head of the Manufacturing
vertical at TCS. TCS’ performance in the manufacturing vertical has been flattish
over last 5 quarters (revenues of USD 133 mn in 1QFY11 versus USD 129 mn in
1QFY10). Manufacturing has been a relative laggard in the TCS portfolio.
However, several positives are emerging. Key takeaways are as follows:
• Automotive and industrial segments key reasons for the slowdown but
stability now seen. TCS’ high exposure to the troubled Automotive segment
has been the key reason for the poor performance in this segment as Automotive
has come off to ~40% of Manufacturing segment from previous levels of ~45%.
Management indicated that Industrials segment (18% of manufacturing
revenues) and Aerospace segment (22%) have been impacted as well during the
downturn though to a lesser extent. The process industries segment (~10%, this
includes cement, pulp, chemicals sub-segments) was the sole growing segment
as these industries were laggards in outsourcing (from ~5% two years back).
• Today, all the sub-segments in this vertical have better growth prospects in the
coming 2-3 quarters given macro-economic recovery. Growth is back in
manufacturing and hereon should be at least in line with company-average.
• Discretionary spends are noticeably increasing as management saw increased
spends on Enterprise solutions (SAP/Oracle package implementations, 26% of
mfg. revenues) and new engineering/ emerging technologies (mobility).
Discretionary spending constitutes ~40% of manufacturing revenues. Notably,
engineering contributes a third of manufacturing’s revenues. Management sees
caution only in the macro, without any impact on any customer engagement(s).
• Comfortable on margins. Margins for TCS in manufacturing are higher than
BFSI and retail segments, with management targeting further improvement
through productivity improvements, operational efficiencies and selectively
better pricing in the coming quarters. Offshore leverage will be an additional
margin lever. We believe that margins will improve, albeit more modestly than
before. TCS’ commentary on margins, in general, continues to be positive.
• Increased focus on non-linearity, though meaningful contribution still 3-4
quarters away. TCS has rolled out standardized versions of services such as
Procurement, Analytics, HRO, F&A on a hosted basis. According to TCS, this is
likely take off as the cloud model becomes popular over the coming 1-2 years.
• TCS is our top pick among the large-caps in the Indian IT sector.
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