Offshore IT/BPO: Positive Read From No. 1 TCS's Quarter:: Wells Fargo

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Offshore IT/BPO: Positive Read From No. 1 TCS's
Quarter
Rapid Growth, High Operating Margin, Positive Tone--Foreign
Exchange Becoming Issue

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• Summary. Largest Offshore IT/BPO Provider Tata Consultancy
Services (TCS) Reported Very Strong CQ3 And Offered A Rather
Positive Tone. Reinforces Our Positive View Toward CTSH. TCS
reported revenue growth of 10.4% qtr/qtr and 29% yr/yr (U.S. GAAP/U.S. dollar
terms), which press reports indicated was above expectations for this Indiatraded
company. Volume growth was up a very strong 11.2%. Double-digit
sequential growth was across both verticals and geographies. Strength was not
viewed as release of pent-up demand, but rather steady recovery and increased
use of offshore capabilities. TCS won eight large deals as the legacy offshore
providers continue to prove they can participate with the more global providers.
High utilization, revenue-driven SG&A leverage, and favorable foreign exchange
(FX) led to record operating margin of 28.0%. TCS believes more margin upside
is possible, but noted the sharply unfavorable turn in FX since the beginning of
September will weigh on CQ4. Given improved demand, TCS sees pricing
improving in CY2011. Gross and net hiring was very strong, more than offsetting
sticky high employee attrition of 13.1% (trailing 12 months, IT services only; our
estimate is 19.3% for the quarter annualized). While not providing specific
guidance, management was as positive as we have heard it in some time on the
outlook.