TCS: Stellar Sept quarter – double-digit growth across all verticals:: Nomura

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 Action
TCS saw solid growth in 2Q FY11, beating the Street and our estimates by a wide
margin. The stock has followed a similar pattern in past six month, outperforming
Infosys and the Sensex by 11-14%. While we believe the results justify the stock’s
re-rating against Infosys, near-term upside is likely to be capped on: 1) sweating of
all possible operational levers; and 2) current valuation being above the long-term
average. Remain NEUTRAL, with PT revised up to Rs1,000.
 Catalysts
Higher-than-anticipated volume growth and price increases, could offer upside to
our price target.
Anchor themes
Broad-based growth, vendor consolidation and increasing IT investments by clients
to drive growth and efficiency bode well for growth at the top-tier Indian IT vendors.



Cranking it up
 Stellar quarter – double-digit growth across all verticals
TCS recorded solid US$ revenue growth of 11.7% in 2QFY11 – which
was much ahead of our estimates (5.8% q-q) and that of consensus.
This is the second consecutive quarter that TCS has outperformed
peer Infosys in revenue growth. The volume growth of 11.2% q-q was
led by double-digit growth across all verticals and geographies.
 Margin improvement in line, aided by one-offs
EBITDA margin improvement of 70bps q-q was in-line with our
estimates, partly aided by almost a 90bps benefit from rental
rationalisation and 20bps from bad-debt provision write-backs — both
of which are likely to reverse in the next quarter, in our view.
 Robust demand outlook; budgets likely to increase
Management sounded very confident about the demand outlook and
expected TCS to benefit as clients increased spending towards
growth and increasing efficiency. There were 8 large deal wins in the
quarter and gross employee addition of 19,000 employees seem
indicative of the robust volume growth likely in the near term.
 Re-rating factored in; reiterate NEUTRAL call
We increase our revenue and EPS estimates on the back of the
better-than-expected 2Q performance. We now value TCS at par with
Infosys using 20x (from 19x earlier) one-year forward earnings on
account of superior growth and narrowing margin differential with
Infosys. However, outperformance of TCS compared to peer Infosys
(14%) and the Sensex (11%) over the past 6 months prices in most of
the upside, in our view. We increase our PT to Rs1,000 and stay
NEUTRAL on less valuation comfort and limited scope for operational
upside.