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TCS: Raising estimates, price target…
While historically Infosys was the preferred portfolio pick among Indian
outsourcers due to known reasons, six quarters of relative
outperformance, by TCS could alter that view (Figure 1). Further, TCS,
to a great extent, appears a cohesive unit under Chandra. Finally,
though a lack of ADR could hinder our belief, we believe portfolio
buying led by preference shift within Tier I vendors, could lead to a rerating of the stock. Consequently, we are raising our FY12E and FY13E
EPS estimates and our price target to | 1280 from | 1210 earlier.
ƒ Solid beat
TCS reported 7% US$ revenue growth in Q3FY11 led by a strong
5.7% volume growth and beat our as well as consensus estimates.
Indian GAAP revenues grew 4.1% QoQ and 26.3% YoY to | 9,663
crore. At | 2,713 crore, EBIT was higher relative to our | 2,630 crore
estimate on higher EBIT margin of 28.1% vs. our 27.5% estimate.
The company earned | 11.9 in earnings aided by F/X, treasury gains.
Valuation
We are raising our estimates and expect TCS to report US dollar revenue
growth of 23.6% CAGR vs. 23% CAGR earlier over FY10-FY12E. Further,
we have revised EPS estimate for FY12E and FY13E by 2% and 1.7%,
respectively. Finally, we value TCS at | 1,280 (| 1,210 earlier) i.e. at 22x
FY13E EPS estimate of | 49 (| 48) and upgrade to BUY from ADD rating.
ƒ Hiring suggests strong Q4FY11
TCS hired 20,219 (consolidated, 16,847 in IT) heads in Q3FY11
including 7,737 laterals and 7,598 freshers while utilisation including
trainees declined 60 bps to 77.1% vs. 77.7% in Q2FY11. Noticeably,
TCS expects to hire 12-15,000 gross heads in Q4FY11, higher
compared to ~5,900 guided by Infosys. This implies that a stronger
Q4 relative to Infosys is likely.
ƒ Operating metric highlights
Banking, financial services & insurance (44.6% of revenue grew
8.4% QoQ vs. 10% in Q2FY11. Life sciences, transportation and
media & entertainment grew 9%, 14% and 23% QoQ, respectively,
led by demand across service lines. Continental Europe posted
9.3% QoQ growth while UK grew 11.9% QoQ. India, 9.2% of
revenue, saw muted demand and declined 0.6% QoQ. North
America continued its momentum with 6.6% QoQ growth on top of
9.1% and 8.4% QoQ growth in Q2FY11 and Q1FY11. Active client
roster increased to 959 vs. 936 in Q2FY11 as TCS added 35 new
clients.
Valuation
We are raising our estimates and expect TCS to report US dollar revenue
growth of 23.6% CAGR vs. 23% CAGR earlier over FY10-FY12E. Further,
we have revised our EPS estimate for FY12E and FY13E by ~2% and
1.7%, respectively. Finally, we value the stock at | 1,280 (| 1,210 earlier)
i.e. at 22x FY13E EPS estimate of | 49 (| 48) and upgrade to BUY from
ADD rating
Risk & concern
Though the pound, euro and Australian dollar created tailwinds in
Q3FY11, cross currency volatility remains a key concern. The 9MFY11
average rupee/$ rate stood at 45.6. Were the rate to remain at today’s
levels for the remainder of the year, the average rupee/$ rate could be
45.5 for FY11E vs. 47.3 for FY10, or an appreciation of ~3.8%.
Incremental appreciation from these levels would create downside risks
to our estimates. As a reminder, every 100 bps movement in the currency
impacts operating margin by ~20-50 bps depending on the operating
model.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS: Raising estimates, price target…
While historically Infosys was the preferred portfolio pick among Indian
outsourcers due to known reasons, six quarters of relative
outperformance, by TCS could alter that view (Figure 1). Further, TCS,
to a great extent, appears a cohesive unit under Chandra. Finally,
though a lack of ADR could hinder our belief, we believe portfolio
buying led by preference shift within Tier I vendors, could lead to a rerating of the stock. Consequently, we are raising our FY12E and FY13E
EPS estimates and our price target to | 1280 from | 1210 earlier.
ƒ Solid beat
TCS reported 7% US$ revenue growth in Q3FY11 led by a strong
5.7% volume growth and beat our as well as consensus estimates.
Indian GAAP revenues grew 4.1% QoQ and 26.3% YoY to | 9,663
crore. At | 2,713 crore, EBIT was higher relative to our | 2,630 crore
estimate on higher EBIT margin of 28.1% vs. our 27.5% estimate.
The company earned | 11.9 in earnings aided by F/X, treasury gains.
Valuation
We are raising our estimates and expect TCS to report US dollar revenue
growth of 23.6% CAGR vs. 23% CAGR earlier over FY10-FY12E. Further,
we have revised EPS estimate for FY12E and FY13E by 2% and 1.7%,
respectively. Finally, we value TCS at | 1,280 (| 1,210 earlier) i.e. at 22x
FY13E EPS estimate of | 49 (| 48) and upgrade to BUY from ADD rating.
ƒ Hiring suggests strong Q4FY11
TCS hired 20,219 (consolidated, 16,847 in IT) heads in Q3FY11
including 7,737 laterals and 7,598 freshers while utilisation including
trainees declined 60 bps to 77.1% vs. 77.7% in Q2FY11. Noticeably,
TCS expects to hire 12-15,000 gross heads in Q4FY11, higher
compared to ~5,900 guided by Infosys. This implies that a stronger
Q4 relative to Infosys is likely.
ƒ Operating metric highlights
Banking, financial services & insurance (44.6% of revenue grew
8.4% QoQ vs. 10% in Q2FY11. Life sciences, transportation and
media & entertainment grew 9%, 14% and 23% QoQ, respectively,
led by demand across service lines. Continental Europe posted
9.3% QoQ growth while UK grew 11.9% QoQ. India, 9.2% of
revenue, saw muted demand and declined 0.6% QoQ. North
America continued its momentum with 6.6% QoQ growth on top of
9.1% and 8.4% QoQ growth in Q2FY11 and Q1FY11. Active client
roster increased to 959 vs. 936 in Q2FY11 as TCS added 35 new
clients.
Valuation
We are raising our estimates and expect TCS to report US dollar revenue
growth of 23.6% CAGR vs. 23% CAGR earlier over FY10-FY12E. Further,
we have revised our EPS estimate for FY12E and FY13E by ~2% and
1.7%, respectively. Finally, we value the stock at | 1,280 (| 1,210 earlier)
i.e. at 22x FY13E EPS estimate of | 49 (| 48) and upgrade to BUY from
ADD rating
Risk & concern
Though the pound, euro and Australian dollar created tailwinds in
Q3FY11, cross currency volatility remains a key concern. The 9MFY11
average rupee/$ rate stood at 45.6. Were the rate to remain at today’s
levels for the remainder of the year, the average rupee/$ rate could be
45.5 for FY11E vs. 47.3 for FY10, or an appreciation of ~3.8%.
Incremental appreciation from these levels would create downside risks
to our estimates. As a reminder, every 100 bps movement in the currency
impacts operating margin by ~20-50 bps depending on the operating
model.
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