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TCS (TCS)
Technology
Upbeat demand outlook; investing for the future. In sync with our recent
discussion with peers, TCS management expressed a good degree of comfort on strong
volume visibility for the next 1-2 quarters while qualifying FY2012E revenue growth
with ‘cautious on macro’ and ‘too early’ comments. Nevertheless, confidence on
revenue growth appears high and ties in with our broad sector thesis. We reiterate
positive Tier-I bias with TCS and Infosys being our top picks.
Upbeat on near-term demand momentum; guarded optimism on medium-term prospects
TCS management cited a visible acceleration in decision-making pace among its client base (“deal
closures are happening thick and fast”) while expressing confidence in sustenance of strong
volume momentum in the near term. Milestone deals like the recent core banking deal signed with
Deutsche Bank (multi-year 30-country core banking rollout) are clear early indicators of improving
discretionary spend trend, per the management. Overall macro uncertainty and still-modest
revenue recovery in a couple of sub-verticals within the manufacturing and telecom segments
drove guarded optimism on medium-term revenue outlook. The management also indicated a
stable pricing environment with an upward bias, especially on new deals.
On the Dec 2010 quarter, management appeared comfortable with a 5-6% sequential revenue
growth outlook while indicating potential pressure on margins on account of lower utilization,
Rupee appreciation and non-recurrence of rent expense reversals in the Sep 2010 quarter.
Platforms, banking product, SMB thrust among the key areas of investments
TCS management attributed the recent strong revenue performance to some of the investments
and organizational initiatives taken over the past few years; key ones being – (1) push towards fullservice capability with significant investments in shoring up BPO, IMS, and consulting practices,
(2) better account management model for large accounts, (3) geographic dispersion – we note
that TCS is a clear leader among the Indian IT names on this aspect, (4) near-shore delivery centers,
and (5) change in organization structure in CY2008. In addition to continued thrust on geographical
dispersion and near-shore delivery centers, TCS management highlighted platforms-based BPO,
SMB offerings (pilot underway in the domestic market), and banking product as the key areas of
investments for the next 2-3 years.
30% revenue growth in FY2012E possible, in our view
We believe FY2012E has the potential to be a 30%+ constant currency revenue growth year for
TCS (please see our sector note dated Dec 1, 2010 for details). Greater confidence on such a
scenario should mean further revenue/EPS upgrades, driving stock performance despite seemingly
rich valuations. We reiterate BUY. Our current estimates are under review.
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