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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.
