Tata Consultancy Services- Growth engine chugging smoothly:: Macquarie Research,

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Tata Consultancy Services
Growth engine chugging smoothly
Event
 Tata Consultancy Services is India’s leading IT services, business solutions
and outsourcing company with more than 950 active clients. A part of the
Tata Group, India’s largest industrial conglomerate, TCS has over 186,000
employees in 42 countries and is listed on the National Stock Exchange and
Bombay Stock Exchange in India. We are forecasting consolidated revenues
to grow to US$8.2bn for FY11.

Impact
 Revenue growth fuelled by sustained uptick in volume growth: Our
superior volume growth forecast for TCS is based on two key factors: (1) the
highest exposure of TCS among the trio to the BFSI vertical; and (2) TCS has
the most diversified geographical revenue mix. In addition, we believe that
TCS is best placed to capitalise on the domestic growth opportunities given its
experience and long association with corporates in the local market.
 Products business gaining momentum. TCS reported a 22% QoQ jump in
3Q FY11 after the lull seen in the last two quarters. We are positive on the
opportunities in this segment and highlight this service offering as a key driver of
sustainable growth. Currently, the segment contributes 4% of revenues.
 Skewed revenue mix towards fixed-price projects is margin accretive.
Indian IT service providers have focused on deriving a higher share of
revenues from fixed-price projects due to the accretive margin profiles of such
projects vs time-and-materials contracts. We note TCS is the industry leader
in this regard and derives 50% of its revenue from fixed-price projects (vs
43% for Infosys and 46% for Wipro).
 Record US$ revenue and volume growth amongst peers. TCS has
consistently achieved industry leading US$ revenue and volume growth in
comparison to other Tier 1 players. The past performance gives us confidence
in our estimates for FY12 (see Figs 5 & 7).
Action and recommendation
 We recommend that investors play the sector through TCS. We remain
positive on TCS as the company continues to deliver industry leading volume
growth and executes ably on the margin front.


Tata Consultancy Services Aide Memoire
1. All the commentary surrounding client IT budgets and demand scenario has been very bullish. What do you think can go
wrong?
2. What does the deal funnel look like? Has the Request for Proposal (RFP) cycle returned back to pre-crisis levels?
3. You have been the industry leader in volume growth. How much of this demand is attributed to one-time work related to
M&A?
4. What gives you the confidence that you can sustain the margin improvement that you achieved during the last eight
quarters?
5. We have seen some of your smaller peers give a mid-term hike to its employees. What is your take on the wage inflation in
the industry?
6. 3Q saw the first of the upticks in pricing improvement post the downturn. What do you attribute this to – improvement in
billing rates or is it just the change in the business mix?
7. What is the company’s strategy with regards to emerging markets like Latin America and China?
8. Media reports have talked about the “SME cloud offering” from TCS. What has been the response in the test phase and
what is the revenue potential?
9. We have seen great traction in the banking product business both at TCS and your peers. What is driving this
performance? Is this pent-up demand coming out of a recession or do you think the products have matured enough to
drive sustained growth for the company?
10. What role do you envisage for M&A to play in your growth strategy? Can you share the key criteria you use to evaluate
your target?