TCS:: 3Q: Another quarter; another beat:: Macquarie Research

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Tata Consultancy Services
3Q: Another quarter; another beat
Event
 TCS reported impressive 3Q results, beating street expectations on both top line
and bottom line. The company delivered another quarter of robust volume growth
(5.7% QoQ) without any slippage on margins (up 7bp QoQ). TCS remains our top
pick with revised TP of Rs1,360. See pages 5 and 6 for 3Q results.

Impact
 TCS surprises again. The company has yet again delivered impressive
performance that beat heightened investor expectations. TCS 3Q revenues of
US$2,144m (up 6.9% QoQ) were in line with our expectations. Volume growth
for the quarter was 5.7% QoQ (vs our est. of 6%) and pricing improvement
was 1.2% QoQ (vs our assumption of flat pricing). 3Q EPS of Rs11.91 was
10% ahead of estimate due to higher margins and forex gain.
 Margins remain stable despite currency headwinds. We had anticipated a
60bp QoQ margin dip for TCS in the quarter following currency appreciation
and reversal of rent provision that had helped the company in 2Q. Even so,
TCS managed to keep its EBIT margins flat at 28.1% in the quarter with
offshore revenue shift (+23bp) and productivity changes (+97bp) negating the
currency impact (-112bp).
 Size advantage helps manoeuvre utilization, hence margins. TCS added
20K employees in the quarter, taking its total employee strength to 187K.
Management guided to adding 12–15k employees in 4Q given the strong
demand outlook. The increased employee base provides the company
increased comfort to run utilisation at historic highs and extract efficiencies.
 Products business gaining momentum. TCS reported a 22% QoQ jump in
the segment after the lull seen in last two quarters. This is in line with the trend
we have seen at Infosys. We are positive on the opportunities in this segment
and highlight this service offering as a key driver of sustainable growth.
 Raising estimates – FY12 EPS 6% above consensus. We have updated
our model for revised currency assumptions. We have made no major change
to our business assumption but increased our margin forecast following more
benign INR/USD rate. See Fig 5 for summary of our estimate changes.
Earnings and target price revision
 We are increasing our FY11E–13E EPS by 3%, 9%, 15%, respectively, to
account for revised currency forecast. Our new TP is Rs1,360, up from
Rs1,200 earlier.
Price catalyst
 12-month price target: Rs1,360.00 based on a DCF methodology.
 Catalyst: Finalization of CY11 client budgets, large deal wins.
Action and recommendation
 Reaffirm OP. We remain positive on TCS as the company continues to
deliver industry leading volume growth and executes ably on the margin front.