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Tata Consultancy
Another strong year ahead
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways...
„Management remains upbeat for 2011
On-ground demand momentum remains strong for TCS across verticals and
services with manufacturing and, correspondingly, enterprise application services
being the only relative laggards. Geographically, US and Asia-Pacific remain
strong heading into 2011 while in UK/Europe increased offshoring is driving
growth. Billing rate increases seeing an upward bias but not a definitive trend yet.
Offshoring gaining traction as a mainstream option, as per
recent customer survey
According to the company, part of the reason for the strong pick-up in demand
has been the increasing use of offshoring as a mainstream option by existing
clients. New adopters of offshoring are also exploring ways of rapidly increasing
offshore usage in a short span of time. Discretionary spends are on the rise too.
Should be able to achieve ~27% EBIT margin next year as
well
TCS hopes to be able to maintain its targeted EBIT margins of ~27% even next
year, barring any significant currency volatility. The low hanging fruit in terms of
margin drivers have been pulled i.e. improved offshoring, SG&A rationalization
and higher utilization. Going forward, the key levers are improving realization
through non-linear initiatives like platform BPO, cloud-based SMB offering and
products, scale benefits in non-employee SG&A, and investments made in new
solutions, geographies are beginning to pay off. Wage inflationary pressures are
similar to last year. Currency hedging covers for 1-2 quarters at minimum level of
~Rs45/USD. Also hedging UK Pound and Euro.
Client adds, large deal wins & employee adds on a roll
We remain confident of our nearly 30% USD revenue growth estimate for FY11 and
FY12, based on 1) a robust hiring target at 12,000-15,000 gross employee adds
after having completed the annual target of 50,000 gross hires in 9 months and 2)
23 net client adds, including 9 large deal wins, in a seasonally weak third quarter.
Price objective basis & risk
Tata Consultancy (TACSF)
Our Price Objective of Rs1,400 is based on a target FY12 EV/EBITDA to 2yr
EBITDA growth of 0.85x, in line with Infosys. This implies a target FY13e PE of
22x, in-line with current 1-yr forward (FY12e) PE. Downside risks to estimates
stem from macro led delays in IT spend or sharp appreciation of the Rupee.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Consultancy
Another strong year ahead
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways...
„Management remains upbeat for 2011
On-ground demand momentum remains strong for TCS across verticals and
services with manufacturing and, correspondingly, enterprise application services
being the only relative laggards. Geographically, US and Asia-Pacific remain
strong heading into 2011 while in UK/Europe increased offshoring is driving
growth. Billing rate increases seeing an upward bias but not a definitive trend yet.
Offshoring gaining traction as a mainstream option, as per
recent customer survey
According to the company, part of the reason for the strong pick-up in demand
has been the increasing use of offshoring as a mainstream option by existing
clients. New adopters of offshoring are also exploring ways of rapidly increasing
offshore usage in a short span of time. Discretionary spends are on the rise too.
Should be able to achieve ~27% EBIT margin next year as
well
TCS hopes to be able to maintain its targeted EBIT margins of ~27% even next
year, barring any significant currency volatility. The low hanging fruit in terms of
margin drivers have been pulled i.e. improved offshoring, SG&A rationalization
and higher utilization. Going forward, the key levers are improving realization
through non-linear initiatives like platform BPO, cloud-based SMB offering and
products, scale benefits in non-employee SG&A, and investments made in new
solutions, geographies are beginning to pay off. Wage inflationary pressures are
similar to last year. Currency hedging covers for 1-2 quarters at minimum level of
~Rs45/USD. Also hedging UK Pound and Euro.
Client adds, large deal wins & employee adds on a roll
We remain confident of our nearly 30% USD revenue growth estimate for FY11 and
FY12, based on 1) a robust hiring target at 12,000-15,000 gross employee adds
after having completed the annual target of 50,000 gross hires in 9 months and 2)
23 net client adds, including 9 large deal wins, in a seasonally weak third quarter.
Price objective basis & risk
Tata Consultancy (TACSF)
Our Price Objective of Rs1,400 is based on a target FY12 EV/EBITDA to 2yr
EBITDA growth of 0.85x, in line with Infosys. This implies a target FY13e PE of
22x, in-line with current 1-yr forward (FY12e) PE. Downside risks to estimates
stem from macro led delays in IT spend or sharp appreciation of the Rupee.
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