Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS' 3QFY11 revenue is in line with our estimate, though EPS came ahead by 6% (Rs11.9 v/s our estimate of Rs11.2)
due to (1) higher other income, (2) lower tax rate, and (3) continuation of provision write-backs. Key highlights are:
Revenue grew 7% QoQ to US$2,144m, driven by volume growth of 5.7% (v/s 3.1% for Infosys) and blended pricing
uptick of 1.2% (v/s 0.5% for Infosys). Strong revenue growth assumes greater significance given that 3Q is a seasonally
weak quarter and there was no budget flush.
IMS (19.5% QoQ) and Assurance Services (15.1% QoQ) have continued to lead growth, with double-digit sequential
growth for the third consecutive quarter. As was the case for Infosys, Telecom was weak (-0.5% QoQ v/s -0.8% at
Infosys), though the weakness was driven by the Indian geography unlike North America for Infosys.
1.2% sequential increase in constant currency pricing was a key positive, led by (a) scale up of contracts renewed at
higher prices, and (b) 25.9% sequential growth in Asset Leverage Solutions business. Margin headwind on appreciation
of the Rupee (-112bp) was offset by: (a) mix shift towards offshore (23bp offset), and (b) higher productivity (97bp).
Demand environment remains strong as evidenced by the company's guidance to recruit 12k-15k employees in
4QFY11; significant in the context of declining attrition levels. Also, deal activity remains strong, with the company
having closed nine large deals during the quarter. The management remains positive that discretionary spends will be
higher in FY12 v/s FY11.
We believe that 3Q results are unlikely to change investor opinion on the stock either way. Volume and pricing outperformance
(CC) to Infosys is a positive. However, low quality beat on EPS implies that estimates for FY12 are unlikely to move
measurably higher. We have revised our EPS estimate higher by 1.6% for FY12 and 1.3% for FY13, primarily on account
of change in our currency assumptions (Rs45 for FY12 and Rs44 for FY13). The stock trades at 21.9x FY12E EPS of
Rs52 and 18.6x FY13E EPS of Rs61.3. Maintain Neutral, with a target price of Rs1,225 (20x FY13E EPS) - 7.6% upside
Growth broadbased; IMS continues to shine; underperforms Infosys in
discretionary segments
Growth was broadbased, with Telecom and 'Others' being the only two verticals reporting
de-growth. Media and Entertainment, Hi-Tech and Transportation were the fastest growing
verticals, reporting sequential growth of 23%, 16.3% and 13.7%, respectively. Among the
larger verticals, BFSI and Retail continued the momentum shown in 2QFY11 and grew
8.4% and 7%, respectively.
TCS continues to do well in Infrastructure Services, with IMS growing from 8.3% of
revenue in 4QFY10 to 10.5% in 3QFY11, whereas IMS' contribution to Infosys' revenue
declined from 7.2% to 6% during the same period. Contrastingly, the proportion of Consulting/
Package Implementation declined to 11.9% in 3QFY11 v/s 15.1% two years ago for TCS,
whereas it increased from 25.1% in 3QFY09 to 25.9% in 3QFY11 for Infosys. Within
Enterprise Solutions, TCS is getting unduly impacted because of its high exposure to the
Auto segment historically as represented by Manufacturing now being 7.2% of its revenue
as against 10.6% in 3QFY09.
A differentiated verticalized approach towards testing is helping TCS gain share in Assurance
Services, which has grown at a CQGR of 16.2% over the last four quarters.
Low quality beat on earnings ex-pricing; utilization to be maintained at higher
levels
EPS of Rs11.9 was 6% higher than our estimate of Rs11.2, primarily on account of low
quality factors like: (1) higher other income, (2) lower tax rate, (3) continuation of provision
write-backs. We model normalized bad debt provision at 0.3% of sales from hereon.
Though utilization declined on a sequential basis to 77.1% (including trainees; 77.7% in
2QFY11), management is confident of maintaining utilization at higher levels, going forward.
US$ revenue growth of 7% QoQ, EBIT margin up 8bp QoQ to 28.1%
Revenue growth of 7% QoQ to US$2,144m is in line with our estimate (v/s Infosys'
growth of 6% QoQ)
Volume growth of 5.7% QoQ (v/s our estimate of 6.5% QoQ and Infosys' 3.1%
QoQ)
In Indian rupee terms, revenue at Rs96.6b grew by 4.1% QoQ (v/s our estimate of
Rs96.3b)
EBITDA margin improved 20bp QoQ to 30.2% (v/s our estimate of 50bp decline),
driven by continued write-back of bad debt provisions (-30bp v/s our estimate of
+50bp)
EBIT margin improved 8bp to 28.1% v/s estimated decline of 60bp to 27.4%
SGA as percentage of sales (excluding depreciation) increased by 10bp to 16.8% (v/
s our estimate of 17%)
Other income was Rs1.8b v/s our estimate of Rs1b due to forex gains of Rs520m
Effective tax rate was 18.6% (v/s our estimate of 19%)
Profit after tax was Rs23.3b, up 10.6% QoQ (v/s our estimate of Rs21.9b); EPS was
Rs11.9 (v/s our estimate of Rs11.2)
Other highlights
The company added 12,497 employees on a net basis, taking the total employee count
to 186,914.
Attrition increased to 14.4% during the quarter v/s 14.1% in 2QFY11 (and v/s 17.5%
at Infosys in 3QFY11).
Nine large deals were closed during the quarter.
Growth by industry (in US$ terms): BFSI: +8.4% QoQ (v/s +8.3% QoQ at Infosys),
Manufacturing: +4.1% QoQ (v/s +9.8% QoQ at Infosys), Retail: +7% QoQ (v/s +6.6%
QoQ at Infosys), Telecom: -0.5% QoQ (v/s -0.8% QoQ at Infosys).
Growth by services (in US$ terms): Application Development & Maintenance: +2.9%
QoQ (v/s +3.2% at Infosys), Enterprise Solutions: -0.3% QoQ (v/s +6.4% at Infosys),
Infrastructure Management: +19.5% QoQ (v/s 2.5% at Infosys), BPO: +11.9% QoQ
(v/s +6% at Infosys).
Growth by region (in US$ terms): US: +6.6% QoQ (v/s +4.3% QoQ at Infosys),
Europe: +10.9% QoQ (v/s +6.3% QoQ at Infosys).
Tata Consultancy Services: an investment profile
Stock performance (1 year)
EPS: MOSL forecast v/s Consensus (rs)
MOSL Consensus Variation
Forecast Forecast (%)
FY11 44.2 42.7 3.6
FY12 52.0 49.1 5.9
Target Price and Recommendation
Current Target Upside Reco.
Price (Rs) Price (Rs) (%)
1,138 1,225 7.6 Neutral
Recent developments
TCS closed nine large deals across various verticals in
3QFY11.
TCS Bancs won six engagements in core banking,
capital markets and insurance segments across markets.
Besides, four installations went live during the quarter.
Valuation and view
We expect TCS to report revenue CAGR of 22% and
EPS CAGR of 17.8% over FY11-13.
Valuations at 21.9x FY12E and 18.6x FY13E earnings;
maintain Neutral with a target price of Rs1,225 (20x
FY13E earnings).
Sector view
Indian offshoring has been vindicated with the global
clients and service providers making India their base
for IT-enabled solutions. India has less than 5% of the
global IT markets. We are positive on the sector from
a long-term perspective.
The US economy slowdown, wage inflation and sharper
currency appreciation remain key concerns.
We reckon frontline Indian IT companies would be
better placed to sail through near-term adversities.
Niche IT/ITeS services companies with strong business
models are likely to be better placed to face
uncertainties in near term.
Company description
TCS is the largest IT services company in India, with (LTM)
revenue of over US$7.6b. It employs over 186,000 people
and provides IT and BPO services to over 900 global clients.
It is one of the preferred IT vendors for most Fortune 500/
Global 1,000 companies.
Key investment arguments
TCS expects to grow 20%+ YoY for the next three
years; we have modeled volume growth of 26.6% in
FY11 and 23.5% in FY12.
Infrastructure Management Services (IMS), which has
shown stellar growth, is likely to continue doing well,
going forward.
Traction in discretionary trend in BFSI could result in a
mix-based pricing increase.
Key investment risks
The appreciation of the rupee and continued attrition
could hamper profitability.
Supply-side pressures could also impact deliveries.
Slowdown in economic recovery in the US may impact
budget spends.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS' 3QFY11 revenue is in line with our estimate, though EPS came ahead by 6% (Rs11.9 v/s our estimate of Rs11.2)
due to (1) higher other income, (2) lower tax rate, and (3) continuation of provision write-backs. Key highlights are:
Revenue grew 7% QoQ to US$2,144m, driven by volume growth of 5.7% (v/s 3.1% for Infosys) and blended pricing
uptick of 1.2% (v/s 0.5% for Infosys). Strong revenue growth assumes greater significance given that 3Q is a seasonally
weak quarter and there was no budget flush.
IMS (19.5% QoQ) and Assurance Services (15.1% QoQ) have continued to lead growth, with double-digit sequential
growth for the third consecutive quarter. As was the case for Infosys, Telecom was weak (-0.5% QoQ v/s -0.8% at
Infosys), though the weakness was driven by the Indian geography unlike North America for Infosys.
1.2% sequential increase in constant currency pricing was a key positive, led by (a) scale up of contracts renewed at
higher prices, and (b) 25.9% sequential growth in Asset Leverage Solutions business. Margin headwind on appreciation
of the Rupee (-112bp) was offset by: (a) mix shift towards offshore (23bp offset), and (b) higher productivity (97bp).
Demand environment remains strong as evidenced by the company's guidance to recruit 12k-15k employees in
4QFY11; significant in the context of declining attrition levels. Also, deal activity remains strong, with the company
having closed nine large deals during the quarter. The management remains positive that discretionary spends will be
higher in FY12 v/s FY11.
We believe that 3Q results are unlikely to change investor opinion on the stock either way. Volume and pricing outperformance
(CC) to Infosys is a positive. However, low quality beat on EPS implies that estimates for FY12 are unlikely to move
measurably higher. We have revised our EPS estimate higher by 1.6% for FY12 and 1.3% for FY13, primarily on account
of change in our currency assumptions (Rs45 for FY12 and Rs44 for FY13). The stock trades at 21.9x FY12E EPS of
Rs52 and 18.6x FY13E EPS of Rs61.3. Maintain Neutral, with a target price of Rs1,225 (20x FY13E EPS) - 7.6% upside
Growth broadbased; IMS continues to shine; underperforms Infosys in
discretionary segments
Growth was broadbased, with Telecom and 'Others' being the only two verticals reporting
de-growth. Media and Entertainment, Hi-Tech and Transportation were the fastest growing
verticals, reporting sequential growth of 23%, 16.3% and 13.7%, respectively. Among the
larger verticals, BFSI and Retail continued the momentum shown in 2QFY11 and grew
8.4% and 7%, respectively.
TCS continues to do well in Infrastructure Services, with IMS growing from 8.3% of
revenue in 4QFY10 to 10.5% in 3QFY11, whereas IMS' contribution to Infosys' revenue
declined from 7.2% to 6% during the same period. Contrastingly, the proportion of Consulting/
Package Implementation declined to 11.9% in 3QFY11 v/s 15.1% two years ago for TCS,
whereas it increased from 25.1% in 3QFY09 to 25.9% in 3QFY11 for Infosys. Within
Enterprise Solutions, TCS is getting unduly impacted because of its high exposure to the
Auto segment historically as represented by Manufacturing now being 7.2% of its revenue
as against 10.6% in 3QFY09.
A differentiated verticalized approach towards testing is helping TCS gain share in Assurance
Services, which has grown at a CQGR of 16.2% over the last four quarters.
Low quality beat on earnings ex-pricing; utilization to be maintained at higher
levels
EPS of Rs11.9 was 6% higher than our estimate of Rs11.2, primarily on account of low
quality factors like: (1) higher other income, (2) lower tax rate, (3) continuation of provision
write-backs. We model normalized bad debt provision at 0.3% of sales from hereon.
Though utilization declined on a sequential basis to 77.1% (including trainees; 77.7% in
2QFY11), management is confident of maintaining utilization at higher levels, going forward.
US$ revenue growth of 7% QoQ, EBIT margin up 8bp QoQ to 28.1%
Revenue growth of 7% QoQ to US$2,144m is in line with our estimate (v/s Infosys'
growth of 6% QoQ)
Volume growth of 5.7% QoQ (v/s our estimate of 6.5% QoQ and Infosys' 3.1%
QoQ)
In Indian rupee terms, revenue at Rs96.6b grew by 4.1% QoQ (v/s our estimate of
Rs96.3b)
EBITDA margin improved 20bp QoQ to 30.2% (v/s our estimate of 50bp decline),
driven by continued write-back of bad debt provisions (-30bp v/s our estimate of
+50bp)
EBIT margin improved 8bp to 28.1% v/s estimated decline of 60bp to 27.4%
SGA as percentage of sales (excluding depreciation) increased by 10bp to 16.8% (v/
s our estimate of 17%)
Other income was Rs1.8b v/s our estimate of Rs1b due to forex gains of Rs520m
Effective tax rate was 18.6% (v/s our estimate of 19%)
Profit after tax was Rs23.3b, up 10.6% QoQ (v/s our estimate of Rs21.9b); EPS was
Rs11.9 (v/s our estimate of Rs11.2)
Other highlights
The company added 12,497 employees on a net basis, taking the total employee count
to 186,914.
Attrition increased to 14.4% during the quarter v/s 14.1% in 2QFY11 (and v/s 17.5%
at Infosys in 3QFY11).
Nine large deals were closed during the quarter.
Growth by industry (in US$ terms): BFSI: +8.4% QoQ (v/s +8.3% QoQ at Infosys),
Manufacturing: +4.1% QoQ (v/s +9.8% QoQ at Infosys), Retail: +7% QoQ (v/s +6.6%
QoQ at Infosys), Telecom: -0.5% QoQ (v/s -0.8% QoQ at Infosys).
Growth by services (in US$ terms): Application Development & Maintenance: +2.9%
QoQ (v/s +3.2% at Infosys), Enterprise Solutions: -0.3% QoQ (v/s +6.4% at Infosys),
Infrastructure Management: +19.5% QoQ (v/s 2.5% at Infosys), BPO: +11.9% QoQ
(v/s +6% at Infosys).
Growth by region (in US$ terms): US: +6.6% QoQ (v/s +4.3% QoQ at Infosys),
Europe: +10.9% QoQ (v/s +6.3% QoQ at Infosys).
Tata Consultancy Services: an investment profile
Stock performance (1 year)
EPS: MOSL forecast v/s Consensus (rs)
MOSL Consensus Variation
Forecast Forecast (%)
FY11 44.2 42.7 3.6
FY12 52.0 49.1 5.9
Target Price and Recommendation
Current Target Upside Reco.
Price (Rs) Price (Rs) (%)
1,138 1,225 7.6 Neutral
Recent developments
TCS closed nine large deals across various verticals in
3QFY11.
TCS Bancs won six engagements in core banking,
capital markets and insurance segments across markets.
Besides, four installations went live during the quarter.
Valuation and view
We expect TCS to report revenue CAGR of 22% and
EPS CAGR of 17.8% over FY11-13.
Valuations at 21.9x FY12E and 18.6x FY13E earnings;
maintain Neutral with a target price of Rs1,225 (20x
FY13E earnings).
Sector view
Indian offshoring has been vindicated with the global
clients and service providers making India their base
for IT-enabled solutions. India has less than 5% of the
global IT markets. We are positive on the sector from
a long-term perspective.
The US economy slowdown, wage inflation and sharper
currency appreciation remain key concerns.
We reckon frontline Indian IT companies would be
better placed to sail through near-term adversities.
Niche IT/ITeS services companies with strong business
models are likely to be better placed to face
uncertainties in near term.
Company description
TCS is the largest IT services company in India, with (LTM)
revenue of over US$7.6b. It employs over 186,000 people
and provides IT and BPO services to over 900 global clients.
It is one of the preferred IT vendors for most Fortune 500/
Global 1,000 companies.
Key investment arguments
TCS expects to grow 20%+ YoY for the next three
years; we have modeled volume growth of 26.6% in
FY11 and 23.5% in FY12.
Infrastructure Management Services (IMS), which has
shown stellar growth, is likely to continue doing well,
going forward.
Traction in discretionary trend in BFSI could result in a
mix-based pricing increase.
Key investment risks
The appreciation of the rupee and continued attrition
could hamper profitability.
Supply-side pressures could also impact deliveries.
Slowdown in economic recovery in the US may impact
budget spends.
No comments:
Post a Comment