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TCS ------------------------------------------------------------------------------- Maintain OUTPERFORM
Management meeting takeaways: Revenue growth could further strengthen
● We recently met with TCS’ management to get a business update.
Management remains bullish on demand and indicated that
revenue growth should remain robust going forward. Growth
would be led by financials and BPO/infra outsourcing services.
● Management also indicated that attrition and wage inflation could
have peaked. We believe that FY3/11 could have witnessed
higher wage inflation due to absence of wage hikes in the
previous two years. This is no longer the case, and hence the
wage increase could moderate in FY3/12.
● Given the company’s strong growth profile, management remains
confident of maintaining margins around current levels. Utilisation
levels could increase further and bad debts should remain low.
● Comments from various global IT/software companies indicate
that 2011 could be a strong year for IT outsourcing. We remain
comfortable with our 25% EPS CAGR expectations (FY11-13) and
hence maintain our OUTPERFORM rating (target price Rs1325).
We recently met with TCS’ Mr Mahalingam, CFO, and Mr Kedar
Shirali, Director, Investor Relations to get a business update.
See sustained strength in demand environment
TCS’ management remains confident of robust revenue growth over
the next several quarters. Growth should be led by financials, BPO
and infrastructure outsourcing practices.
Financial customers are witnessing an increased pressure to raise
fee-based income. This along with higher regulatory scrutiny could be
leading to investments in infrastructure, customer contact channels
and analytics.
Infrastructure practice could perform strongly on the back of a number
of large contracts (currently with global vendors) coming up for
renewal. In the BPO space, the company believes that IT-led BPO
has become more popular than pure-play BPO.
Easier to manage margins in an era of strong growth
In periods of strong growth, attrition rates and wage inflation tend to
be high. However, management believes that both attrition and wage
inflation could have peaked. Further, strong top-line growth should
allow the company to further increase its utilisation rates (currently at
84% excluding trainees) and manage the employee pyramid. This
should allow the company to maintain margins around the current
levels. Strong receivable policy could also help TCS to keep its bad
debts low.
Surplus over ‘ideal margin' to be reinvested in business
Management stated that it aims to have an ideal margin and would
continue to invest surplus over this into the business.
Management signalled that it has become increasingly marginfocused
and that the following ‘rules’ would help it sustain margins at
the current level: (1) optimise certain costs such as bench costs in
absolute terms rather than as a percentage of sales, (2) ensure that
all investments generate returns in a reasonable amount of time
(3) ensure that each business unit is focused on margins.
A strong year for outsourcing
We believe that 2011 (calendar year) could be a strong year for IT
outsourcing. While the increase in IT budgets of customers could be
modest, customers would increase IT investments by resorting to
lower cost outsourcing options. Recent results of SAP, Oracle,
Accenture and IBM all indicate that global IT/software companies are
also witnessing the same revival in demand as Indian IT vendors.
In this environment, we believe that Infosys and TCS should be able
to exhibit a 30% (USD-based) top-line growth in FY3/12 with flat
margins. This should lead to a 25% EPS CAGR for TCS for the next
two years.
Valuations are also reasonable at 22x FY3/12 EPS. We thus maintain
our OUTPERFORM rating with a target price of Rs1325.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS ------------------------------------------------------------------------------- Maintain OUTPERFORM
Management meeting takeaways: Revenue growth could further strengthen
● We recently met with TCS’ management to get a business update.
Management remains bullish on demand and indicated that
revenue growth should remain robust going forward. Growth
would be led by financials and BPO/infra outsourcing services.
● Management also indicated that attrition and wage inflation could
have peaked. We believe that FY3/11 could have witnessed
higher wage inflation due to absence of wage hikes in the
previous two years. This is no longer the case, and hence the
wage increase could moderate in FY3/12.
● Given the company’s strong growth profile, management remains
confident of maintaining margins around current levels. Utilisation
levels could increase further and bad debts should remain low.
● Comments from various global IT/software companies indicate
that 2011 could be a strong year for IT outsourcing. We remain
comfortable with our 25% EPS CAGR expectations (FY11-13) and
hence maintain our OUTPERFORM rating (target price Rs1325).
We recently met with TCS’ Mr Mahalingam, CFO, and Mr Kedar
Shirali, Director, Investor Relations to get a business update.
See sustained strength in demand environment
TCS’ management remains confident of robust revenue growth over
the next several quarters. Growth should be led by financials, BPO
and infrastructure outsourcing practices.
Financial customers are witnessing an increased pressure to raise
fee-based income. This along with higher regulatory scrutiny could be
leading to investments in infrastructure, customer contact channels
and analytics.
Infrastructure practice could perform strongly on the back of a number
of large contracts (currently with global vendors) coming up for
renewal. In the BPO space, the company believes that IT-led BPO
has become more popular than pure-play BPO.
Easier to manage margins in an era of strong growth
In periods of strong growth, attrition rates and wage inflation tend to
be high. However, management believes that both attrition and wage
inflation could have peaked. Further, strong top-line growth should
allow the company to further increase its utilisation rates (currently at
84% excluding trainees) and manage the employee pyramid. This
should allow the company to maintain margins around the current
levels. Strong receivable policy could also help TCS to keep its bad
debts low.
Surplus over ‘ideal margin' to be reinvested in business
Management stated that it aims to have an ideal margin and would
continue to invest surplus over this into the business.
Management signalled that it has become increasingly marginfocused
and that the following ‘rules’ would help it sustain margins at
the current level: (1) optimise certain costs such as bench costs in
absolute terms rather than as a percentage of sales, (2) ensure that
all investments generate returns in a reasonable amount of time
(3) ensure that each business unit is focused on margins.
A strong year for outsourcing
We believe that 2011 (calendar year) could be a strong year for IT
outsourcing. While the increase in IT budgets of customers could be
modest, customers would increase IT investments by resorting to
lower cost outsourcing options. Recent results of SAP, Oracle,
Accenture and IBM all indicate that global IT/software companies are
also witnessing the same revival in demand as Indian IT vendors.
In this environment, we believe that Infosys and TCS should be able
to exhibit a 30% (USD-based) top-line growth in FY3/12 with flat
margins. This should lead to a 25% EPS CAGR for TCS for the next
two years.
Valuations are also reasonable at 22x FY3/12 EPS. We thus maintain
our OUTPERFORM rating with a target price of Rs1325.
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