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Tata Consultancy
Optimizing Cost Base;
Revenue Productivity Could
Be the Next Focus
What's Changed
Price Target Rs860.00 to Rs985.00
FY10e, FY11e, FY12e EPS +4%, +10%, +11%
Investment conclusion: TCS’s management has been
very successful in lowering the company’s operating
cost structure – now the lowest in the industry, in our
view. After pruning costs, we think driving a step up in
revenue productivity could be the next focus area for
management. We believe cost containment may have
peaked and is fully reflected in the stock price. Further
upside requires enhancing revenue productivity
measures that could be tougher to implement. EW.
Lowest employee, travel and other miscellaneous
costs: 1) TCS has a wage cost of 26k per person, 4%
lower than Infosys. This has been controlled over the last
two years; in FY08 TCS had 12% higher wage cost per
employee than Infosys. 2) Travel and Communication
costs are lower than Infosys in absolute terms and ~40%
less on a per-person basis 3) Other miscellaneous
operating costs are now US$110m per quarter, equal to
US$2500 per person – 23% lower than Infosys.
What is the sustainable margin level? Write-back
from provision of doubtful debts could help margins by
~50bps for TCS in FY11e. Adjusting for lower rent costs
in 2Q, reverting to normalized provisions and forecasting
slightly higher miscellaneous operating costs,
sustainable EBIT margins for TCS appear to be
~26-27%. At the current price, TCS is discounting
20-25% revenue growth with stable margins and
earnings CAGR of 18% for FY11-13e.
Could revenue productivity be the next focus? TCS is
operating 16% below its peak employee productivity levels
of December 2007 and could have room for improvement.
Infosys and Wipro are back to their peak levels already.
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