Report on TCS

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Strong growth to continue in FY12 and beyond; upgrading estimates
TCS is confident of growing at 20%+ for the next three years, driven by demand
traction and incrementally positive cues from clients on CY11 budgets.

Highlights
 Demand environment remains strong. TCS has witnessed broadbased traction
and is confident of growing at 20%+ over the next three years.
 The management hinted at the possibility of higher allocation by its large clients
towards its services in their CY11 budgets. The company's expectation of
significant growth in FY12 is based on the initial budget outlook from existing
large clients and does not factor in upsides from large transformational deals.
This is a key positive.
 Margin upsides from current high levels seem unlikely. However, TCS expressed
its confidence in maintaining ~27% EBIT margins, going forward. Any headwinds
arising out of wage inflation may be cushioned by further flattening of the pyramid
and possible pick-up in pricing.
 While 3QFY11 will continue to manifest broadbased demand, QoQ volume growth
might witness 3-3.5% moderation (from 9.5% in services in 2QFY11). FY11 hiring
is likely to far exceed 50,000, as campus recruitment remains strong in 3QFY11
(gross addition of 30,142 in 1HFY11 and 19,293 in 2QFY11).
We are positive on TCS, given: [1] continued broadbased traction in demand, [2]
impressive delivery on operating performance, and [3] our expectation of margins
sustaining at current levels. We have upgraded our US$ revenue growth estimates to
29.3% (up 2.4%) for FY11 and to 25.3% (up 2.6%) for FY12. We have upgraded our
EPS estimates to Rs43.1 (up 1.9%) for FY11 and to Rs51.1 (up 1%) for FY12. We
revise our target price for the stock to Rs1,124 (22x FY12E EPS) in line with upgraded
estimates and increased confidence in fundamentals. Maintain Neutral.




Outlook on client budgets healthy; pricing up-tick may be couple of quarters
away
TCS expects healthy growth next fiscal based on cues from budget allocations of its key
clients. This does not factor in any incremental trigger in the form of large transformational
deals from new clients, leaving little downside risk to the expectation of robust growth in
FY12. M&A and pent-up demand were not big drivers of overall demand in FY11. M&A
integration has contributed minimally to BFSI strength post 4QFY10. The company
reiterated its confidence of registering 20%+ growth for each of the next three years.
In recent quarters, TCS has been maintaining its guidance of possible pricing up-tick on a
like-to-like basis from the onset of FY12. The company suggested that the impact of such
pricing up-tick might be 2-3 quarters away, though it could manifest by 1QFY12 at the
earliest.
The company has seen discretionary spend happening in its BFSI and Retail verticals, the
two segments that also registered growth during the downturn. Pick-up in discretionary
spend is yet to be seen in other areas.
TCS is pursuing the cloud space aggressively, targeting primarily the SME space. It is
already providing Accounting, Procurement, HR and Analytics as a service in the cloud
for SMEs, with around 300 revenue generating pilot customers (each having revenues of
US$50-300m) in the SaaS space. The stated intent is to have its cloud initiatives contribute
10% of its incremental revenues in some quarter next year, at which time TCS will probably
start reporting cloud revenues separately. TCS does not want to focus on the 'Infrastructure
as a Service' (IaaS) space, though it may partner with other companies in case of clients'
willingness to do away with ownership of assets.