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EARNINGS REVIEW
Tata Consultancy Services Ltd. (TCS.BO)
Neutral Equity Research
Above expectations on volume growth, forex gains; Neutral on valuation
What surprised us
TCS reported 3QFY11 revenues of Rs96.6bn and net income of Rs23.7bn;
net income was 5%/9% above GSe/ Bloomberg consensus. Revenues were
up 4.1% qoq led by 5.7% volume growth and 1.2% pricing increase. EBIT
margins remained stable helped by high utilization rate of 77.1% despite
20k net adds in the last two quarters. Higher non-op. income (Rs512mn fx
gains) and lower tax rate (17.4%) contributed to EPS beat. BFSI remained
strong with 5.5% qoq growth; telecom went down 3.3% qoq (INFY telecom
revenues also down qoq, suggesting this is an industry wide trend). TCS
added 10.5k billable employees in 3Q; highest net adds ever, suggesting
strong revenue growth expectations and a robust deal pipeline. It has
already met its FY11 gross hiring guidance of 50k, guiding for another 12k-
15k adds in 4QFY11. UK and continental Europe continued to grow above
overall growth, allaying concerns on economic headwinds from the EU.
What to do with the stock
We stay Neutral on TCS and maintain our 12-m Director's Cut-based TP of
Rs1,264, implying 11% upside. We fine-tune our FY11E-FY13E EPS by up to
2.8%. Among the large cap Indian IT space, we prefer Infosys (INFY.BO,
Buy, Rs3,267.95), owing to higher FY12E revenue/EPS growth of 28%/30%.
However, we reiterate our bias for large-caps and would seek to
accumulate TCS on any weaknesses, owing to its high growth prospects
(21% EPS CAGR over FY10-FY13E). Stock is trading at 21.3X FY12E EPS, at
the higher end of the 6-yr historical valuation range. Risks: faster economic
recovery (upside); currency volatility (downside).
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