TCS --Elephant or a cheetah? Apple-esque beat. BUY. says Kotak Sec

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TCS (TCS)
Technology
Elephant or a cheetah? Apple-esque beat. BUY. TCS delivered another size-defying,
picture-perfect quarter posting 11.7% qoq US$ revenue growth, a 90 bps qoq
expansion in margins, and a 30% yoy net income growth – an Apple-esque beat in the
IT services context. We remain positive on the underlying demand environment for
offshore IT services and reiterate our Tier-I bias. Upgrade TCS’ FY2011/12E EPS by
2.2/3.8% and end-March 2012E target price by 14% to Rs1,100 (Rs965 earlier). BUY.



Find faults if you must; we focus on fundamental strengths
Naysayers and skeptics could point at macro uncertainty, weak quarter for large US banks,
protectionism and other issues possibly, but we focus on what we believe are two fundamental
forces working in favor of the Tier-I Indian IT companies – (1) secular off-shoring trend – expected
counter-cyclicality failed to play out during the downturn as clients froze decision making but the
trend has made a strong resurgence in the past few quarters and is likely to sustain, in our view,
and (2) wider and deeper acceptance of the Tier-I Indian IT companies (TCS, Infosys, CTS, and
Wipro) as true IT transformation partners, a clear up-move from just a credible cost-reduction
alternative. We have been believers in the strength of the demand environment and the Tier-I
players’ ability to capture the same – Infosys’ and now TCS’ 2QFY11 earnings reports add to our
conviction.
Another picture-perfect quarter; outstanding execution on all parameters
TCS delivered a substantially better-than-expected quarter on all parameters – revenues grew
11.7% qoq crossing US$2 bn, EBITDA margin expanded 70 bps qoq versus our expectation of a
30 bps decline, and net income grew 14% qoq and 30% yoy to Rs21.1 bn. More importantly,
there are no quirks, no aid from one-offs and most revenue-growth parameters (volume growth,
vertical/geo spread, client metrics) display a healthy trend. Also, TCS has once again demonstrated
its leadership in an oft under-appreciated area – demand fulfillment engine – an absolute must for
industry-leading participation in the strong demand environment. Only blemish was the fact that
margins were once again aided by provision reversals and reduction in non-manpower expenses.
Raise earnings despite pressure from stronger Re assumption; raise TP to Rs1,100; BUY
We raise our FY2011E and FY2012E earnings estimates by 2.2% and 3.8% to Rs43 and Rs50,
respectively. We note that the upward revision is despite factoring in a stronger Re (45.5 for
FY2011E and 44.5 for FY2012E versus 46 for both, earlier). The revision is driven by an increase in
both revenue as well as margin assumptions – we now build in 28% US$ revenue growth for
FY2011E and 23% for FY2012E and increase our OPM assumption by 30 and 50 bps for
FY2011/12E. We increase our end-FY2012E target price to Rs1,100 from Rs965 earlier.