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TCS – 3QFY2011 Result Update
Angel Broking maintains an Accumulate on TCS with a Target Price of Rs1,287.
For 3QFY2011, TCS reported good set numbers, outperforming our expectations.
The company hired more than 20,000 employees in 3QFY2011 itself, already
crossing the hiring target of 50,000 for FY2011, and has guided for hiring
~15,000 employees in 4QFY2011. In addition, the hiring outlook for FY2012 is
upbeat, with 37,000 campus offers on the cards and a Lateral:Fresher hiring ratio
of 52:48. This envisages on the company’s strengthening deal pipeline. TCS
continues to remain our top pick amongst tier-I IT companies. We maintain our
Accumulate rating on the stock.
Quarterly highlights: For 3QFY2011, TCS posted revenue of US $2,144mn (v/s
our estimate of US $2,158mn), up 7.0% qoq. This growth was a combination of
volume growth of 5.7% qoq, constant currency pricing improvement of 1.2% qoq,
negative offshore shift effect of 1.1% qoq and favourable cross-currency
movement of 1.2%. EBIT margin grew by 7bp qoq to 28.0%.
Outlook and valuation: Management highlighted that early indications from
clients on IT budgets for CY2011 point to be flat with a positive bias, with a
possibility of an uptick in pricing. Along with its peers, TCS is also witnessing a
trend of clients looking out to spend on IT to drive operational efficiencies and
prepare for future growth, which is leading to a surge in transformational projects
of large sizes. We expect the company’s revenue to post a 28.1% CAGR in USD
terms and a 24.1% CAGR in INR terms over FY2010–12E. EBITDA is expected to
witness a higher CAGR at 24.4%, as the company is reaping the benefits of SG&A
investments made in the past. We value TCS at 25x FY2012E EPS of `51.5.
We maintain Accumulate on TCS with a Target Price of `1,287.
Modest broad-based growth
TCS continues to lead the Tier-I IT pack in terms of volume growth, despite having
the highest manpower base. In 3QFY2011, the company reported revenue of
US $2,144mn (v/s our expectation of US $2,158), up 7.0% qoq, on the back of
modest volume growth of 5.7% qoq, led by growth in mature markets as well as
pricing uptick of 1.2% qoq. The company has witnessed this pricing uptick after
seven quarters. The cross-currency movement benefited USD revenue by 1.2%
qoq, derived due to USD depreciation of 1.9%, 5.1% and 9.1% qoq as against the
GBP, Euro and AUD, respectively.
TCS’s decent performance during the quarter was backed by robust growth across
all the business service segments. Discretionary services such as assurance
services, infrastructure management services (IMS) and global consulting reported
double-digit growth of 15.1%, 19.5% and 17.2% qoq, respectively, increasing their
combined revenue share by 180bp qoq to 19.9%. Asset leveraged solutions
emerged as a strong growth driver, growing by whopping 25.9% qoq and
increasing its revenue contribution by 60bp qoq to 4.0%. Application development
and maintenance (ADM), business intelligence services and engineering and
industrial services also posted decent growth of 2.9%, 1.3% and 4.8% qoq,
respectively.
Industry wise, in 3QFY2011, growth was broad-based across all segments.
However, in the telecom segment, the India business dragged growth, whereas the
international business continued to grow during the quarter. TCS’s anchor sector,
BFSI, which led the recovery in 3QFY2010, continued to be strong with 8.4% qoq
growth. Small segments such as transportation, media and entertainment and
hi-tech posted whopping double-digit growth of 13.7%, 23.0% and 16.3% qoq,
respectively. Other segments such as energy and utilities, life science and
healthcare, retail and distribution and manufacturing also surged by 9.5%, 9.1%,
7.0% and 4.1% qoq, respectively.
Geography wise, mature markets, including US, UK and Continental Europe, led
TCS’s growth by reporting 6.6%, 11.9% and 9.3% qoq growth, respectively.
Revenue from Asia Pacific and MEA region also grew strongly by 19.1% and
12.6% qoq, respectively. India and Latin America were a tad slow in growth
because of end of higher discretionary spend projects and winding up of projects
during the quarter.
In INR terms, revenue came in at `9,663cr (v/s our expectation of `9,680cr), up
4.1% qoq. INR growth was lower than USD revenue growth due to INR
appreciation of 3.5% qoq in 3QFY2011.
Margin outperformance continues
EBITDA and EBIT margins grew by 15bp and 7bp qoq to 30.2% and 28.08%,
respectively, despite headwinds on cross-currency movement. EBIT margin growth
was because of gains of 23bp and 96bp due to offshore effort shift and improved
productivity and SG&A efficiency, respectively, defying the negative impact of
112bp from INR appreciation.
Hiring spree continues, utilisations remain firm
TCS has been on the hiring spree since 3QFY2010. In 3QFY2011, TCS (excluding
subsidiaries) added 16,847 gross employees and 10,827 net employees. The
company has already crossed FY2011 hiring guidance of 50,000 gross additions
on account of continuing buoyant demand. Net employee addition in subsidiaries,
including CMC, WTI, TCS e-Serve and Diligenta, also stood strong at 1,670.
During the quarter, attrition rate slightly inched up by 10bp qoq to 13.2% in TCS
Ltd.; whereas, it spiked up by whopping 220bp to 24.7% in the BPO segment.
Utilisation excluding trainees remained at the previous quarter level at 83.8%.
Utilisation including trainees declined by 60bp qoq to 77.1% because of robust
fresher hiring to map the surge in demand across various verticals.
Significant improvement in the client pyramid
During the quarter, the client pyramid witnessed significant improvement.
One client migrated from the US $50mn–100mn bracket to US $100mn bracket;
two clients migrated from the US $10mn–20mn bracket to US $20mn–50mn
bracket; and eight clients were added in the US $20mn–50mn bracket. The
US $20mn–50mn plus bracket witnessed addition of six new clients in 3QFY2011.
Overall, client addition stood strong, with 35 new clients in 3QFY2011.
Outlook and valuation
Management highlighted that early indications from clients on IT budgets for
CY2011 point to be flat with a positive bias, with a possibility of an uptick in
pricing. Along with its peers, TCS is also witnessing a trend of clients looking out to
spend on IT to drive operational efficiencies and prepare for future growth, which
is leading to a surge in transformational projects of large sizes.
On the back of a strong deal pipeline, TCS has raised its hiring target for FY2011
yet again from 36,000 at the start of the year to 40,000 at the end of 1QFY2011,
50,000 at the end of 2QFY2011 and 65,000 plus currently. The hiring outlook for
FY2012 is also upbeat, with 37,000 campus offers on the cards and a
Lateral:Fresher hiring ratio of 52:48.
We expect TCS’s revenue to post a 28% CAGR in USD terms and a 24% CAGR in
INR terms over FY2010–12E. EBITDA is expected to witness a higher CAGR at
24.4%, as the company is reaping the benefits of SG&A investments made in the
past. We value TCS at 25x FY2012 EPS of `51.5, i.e. at par with industry
benchmark, Infosys, as it continues to bridge the margin gap even on the back of
a higher scale. At current levels, we maintain Accumulate on TCS with a
Target Price of `1,287.
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