Visit http://indiaer.blogspot.com/ for complete details TCS: Robust all-round volume
growth, raise PO to Rs1120
Stellar rev performance; Robust pipeline, Buy
We raise our FY11-13 EPSe by 2 to 5% and, thereby, our PO to Rs1120 (23x
FY12e PE, in line with Infy) post a robust 2Q, with rev and PAT 4% and 5% ahead
of BofAMLe. Revenue grew 13% qq and 25% yy, and PAT grew 14% qq and
30% yy. The key highlight was the all-round strong volume growth of 11% qoq (vs.
Infy at 7%). Bullish management commentary highlighted strong demand
momentum on ground. 2Q EBIT margin was 156bps ahead of our estimate,
helped by scale/Rupee, but, going ahead, Re appreciation and practically no
revenue hedges pose a challenge.
Strong double-digit sequential rev growth across segments
The robust 11% volume growth is notable for the across-the-board growth and
robust 7.4% volume CQGR in last 4 quarters. Not only did discretionary IT svcs
like enterprise solutions grow by a strong 17% qq, infrastructure management
services also grew by an impressive 21% qq. Manufacturing back in business.
Margins surprised positively; Partly due to one-time items
TCS EBIT margin expanded 86 bps qoq, with scale benefits and Rupee
depreciation helping to overcome the impact of compensation increase related to
promotions and variable pay increase. Cost benefits from lower rental on facilities
consolidation and lower bad debt provision helped to the extent of 90bps. To the
credit of management, offshore mix held steady despite strong new project starts.
Bullish on rev outlook; margin headwinds to be watched
Management is bullish on strong demand momentum on ground, with the pace of
deal flow and closure at pre-crisis levels and a robust deal pipeline. TCS closed 8
large deals this quarter and has 11 in the pipeline. Pricing is steady with hope that
it could improve toward fiscal year-end. However, margins are peakish, given
utilization at a high, Re/USD has appreciated & TCS has practically no rev hedge.
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