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Sep-10 Results Better than
Expected
Quick Comment: TCS stock has been relatively strong
versus its peers in the run up to the results, and its
Sep-10 results performance did not disappoint.
2Q11 results beat expectations: TCS reported a
strong set of results, beating expectations on revenue,
margins, and net income. Revenue was US$2bn
(+11.7% QoQ, +30.3% YoY). TCS International
business grew 10.4% QoQ, which was in line with
Infosys’ international revenue growth of 9.7% QoQ. TCS
improved its EBIT margin to 28% (+85bp QoQ, +173bp
YoY) despite promotion-linked wage hikes and higher
variable payout during the quarter. Overall, net income
was Rs21bn (+14% QoQ, +30% YoY).
Sep-10 result highlights: TCS added 19k gross
employees in F2Q and may now hire ~40,000
employees for the full year. TCS is operating at a
historically high utilization rate of 83.8%. Lower
utilization and rupee appreciation of ~4-5% could affect
margins by 50-100bp in 2H, in our view. Overall, we
believe TCS will still be able to improve margins YOY in
F2011.
What’s factored in the price? We believe TCS’ current
stock price currently builds in revenue growth of 25-30%
and ~20-25% in F2011e and F2012e, respectively. Over
the longer term, the price implies TCS achieves revenue
of US$40bn by F2020 (F2010-20 CAGR of ~20% versus
23% CAGR in last five years) with exit EBIT margin of
~24.5% in F2020e.
We expect better entry opportunity in F1H11: TCS
and Infosys results have been along expected lines of a
strong performance in F2Q. TCS stock has done well in
absolute and relative terms over the last three months.
However, at 20-21x forward-year earnings, valuations
remain stretched and are likely to limit significant stock
price gains, in our view.
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