TCS: Moving from strength to strength :: Emkay

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Tata Consultancy Services

Moving from strength to strength

ACCUMULATE

CMP: Rs 1,139                                       Target Price: Rs 1,275

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n     Inline revenues at US$ 2,144 mn(+7% QoQ). Margins improve further by ~20 bps QoQ to 30.2%, despite currency appreciation, normalization of rentals and strong hiring

n     Profits at Rs 23.3 bn (+10.6% QoQ,+29.6% YoY) driven by better margins and higher other income(include Rs 522 mn of forex gains) 

n      Solid operating metrics show with strong hiring(~12k+ net additions coupled with campus hiring targets of ~37k lend support to volume momentum thesis

n     Tweak estimates marginally driving a 0.5/0.3/2.4% upgrade in FY11/12/13E EPS to Rs 43.8/51.3/61.6 respectively. Retain ACCUMULATE with TP upped to Rs 1,275(V/s Rs 1,250 earlier)

Inline revenues, margin show remains commendable

While TCS”s 7% QoQ revenue growth performance was in line with estimates, margins

show was commendable with EBITDA margins improving by ~20 bps QoQ to 30.2%

(V/s Emkay est of ~20 bps decline and street building in ~50-70 bps sequential decline)

especially in the back drop of currency headwinds , strong hiring yet again ( co added

~12,500 employees on a net level) and normalization of rental expenses. Profits at Rs

23.3 bn (+10.6% QoQ, +29.6% YoY) beat estimates driven by higher margins coupled

with forex gains of ~Rs 522 mn. Sequential volume growth was ~5.7%. TCS added

~12,500 employees on a net level during Dec’10 quarter (~7,700 laterals and on the

back of ~10k+ addition in Sep’10 qtr) indicating confidence on volume growth ahead.

Further co mgmt indicated that it intends to hire ~37k freshers for FY12, which in our

view will improve employee mix and be a margin lever ahead.

Operating metrics-nearly an all round performance

TCS’s operating metrics performance continued to be an all round show with growth

remaining broad based across services line/verticals. While revenues from fin

svcs/manufacturing/retail were up by ~8.4%/4.1%/7% QoQ, revenues from IMS and

BPO were up by ~19.5%/11/9% sequentially carrying on the strong traction of the past

few quarters.TCS continues to expand the lead over Infosys through better traction

within BPO and IMS services lines in the recent quarters although Infosys

matches/leads on revenues outside of the two services lines

Tweak estimates marginally, raise TP further to Rs 1,275

TCS’s results vindicate a strong demand momentum for the offshore Tier 1 vendors and

should sooth investor nerves after a moderate disappointment at Infy. We believe that

TCS’s stronger show relative to Infy yet again will continue to lend support to it’s

premium valuation to Infosys. We tweak our rev estimates, raise our margin

assumptions marginally (as we build in EBITDA mgns at 29.9%/29.1%/28.5% V/s

29.8%/29.1%/28,2% earlier for FY11/12/13 respectively) driving a 0.5%/0.3%/2.2%

increase in our FY11/12/13E earnings to Rs 43.8/51.3/61.5 respectively. Retain

ACCUMULATE with a increased TP of Rs 1,275(V/s Rs 1,250 earlier)