TCS: Sept 2010: 2Q: Solid quarter; remains top pick::Macquarie Research,

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Tata Consultancy Services
2Q: Solid quarter; remains top pick
Event
 TCS reported impressive 2Q results beating our street high expectations. We
reaffirm our OP rating and raise our target price to Rs1,200 (from Rs950). TCS
remains our top pick in the sector. (See Fig 3 and 5 for detailed 2Q results).
Impact
 Double digit volume growth stands out. TCS delivered 11% QoQ volume
growth in the quarter. This was on back of industry leading performance we
had seen from the company in 1Q. Earnings commentary from all the leading
vendors gives us confidence on the optimistic demand scenario. We have
raised our FY11–13 US revenue growth estimate by ~3%.
 Margin performance surprises positively. TCS delivered another quarter
of surprising margin performance. Mgmt detailed the levers on the call
attributing 90 bp margin improvement to: FX (+100bp), SG&A efficiency
(+54bp), and rate productivity (+95 bp) partially offset by promotion related
hikes and increased variable pay out (-166 bp). We have revised our margin
assumptions for TCS by 100-150 bp following outperformance delivered by
the company in last two-three quarters. (See Fig 10)
 Record employee addition in 2Q, full year target raised again. TCS had a
gross employee addition of 19K employees in the quarter – highest ever done
by an Indian IT vendor. Management expects to add another 20K employees
by the end of FY11. Employee hiring is a crucial leading indicator of demand
and bolsters our positive investment view.
 Strong performance across all verticals and geographies. Stellar growth
seen this quarter has been very broad based with contribution from all
verticals and geographies. (See Fig 1 and 2 on page 2).
 2Q result details. TCS reported 2Q dollar revenues of US$2,004m (up 11.7%
QoQ vs 10.2% for INFO). In rupee terms, the company delivered revenues of
Rs92.8bn, EBITDA margin of 30% (Vs 33.3% for INFO) and EPS of Rs10.76.
Earnings and target price revision
 We are increasing our FY11E–13E EPS by ~13% each to account for higher
revenues and margin assumption. Our revised TP of Rs1,200 factors in
increased EPS estimates and rolling forward of our DCF to March 2012.
Price catalyst
 12-month price target: Rs1,200.00 based on a DCF methodology.
 Catalyst: Finalization of CY11 client budgets, Large deal wins
Action and recommendation
 Reaffirm OP. We remain positive on TCS as company continues to deliver
industry leading volume growth and executes ably on margin front.