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Investor call takeaways
ƒ Takeaways from investor call with infrastructure services head
ƒ Strong opportunity; segment growth to outpace company growth
ƒ Segment margin similar to company average, can improve further
ƒ BUY: Likely seasonal weakness in 4Q, but FY12 shaping up well
Increasing segment importance
We hosted an investor call with Mr. P.R.
Krishnan, Head of Infrastructure Services,
TCS. Infrastructure Services contributes
10.5% of TCS’s revenue (3QFY11) and
has grown by an average of 12.8% q-q
over the past five quarters, significantly
higher than company average growth of
6.9%. Management expects the trend to
continue and sees the segment
contribution increasing to 15% by FY14.
Key takeaways from the call
1) The overall market size for
infrastructure services is about USD150b,
and is larger than the opportunity in the applications area. But given
TCS’s asset-light model, its addressable size is slightly more than a third
of that. 2) There are growing end-to-end transformation opportunities in
the market place today, and TCS is establishing itself as a mature player.
Despite stiff competition from global vendors, management believes TCS
has been able to differentiate itself by committing to productivity
improvements, offering innovative engagement models, and delivery from
multiple geographic locations. 3) The strongest demand is from financial
services and healthcare clients. These areas together provide over 70%
of the segment’s FY12 pipeline. 4) Contrary to popular perception,
management pointed out that the segment’s profitability is as strong as
that of the overall business because 70-80% of the services are offered
from offshore centres. In addition, there is scope to increase margins
from innovative pricing models and in-house tools and solutions.
Likely seasonal weakness in 4Q, but retain BUY
Separately, the company indicated that 4Q - a seasonally weak quarter –
has been particularly impacted this year due to heavy RFP (request for
proposal) activity through February. Thus, we believe TCS could report 3-
4% q-q USD revenue growth (versus our expectation of 5-6%). Yet, FY12
is shaping up to be a strong year (we see about 25% revenue growth) for
which hiring continues. As a result, utilisation levels could fall in 4Q,
leading to a likely 100-125bps q-q EBIT margin decline. The margin
enhancement programme is coming to an end, so we see limited upside
to FY12 EBIT margin from the current 27-28% range. That said, TCS
continues to give the clearest message on demand among its peers, and
remains a candidate for FY12 revenue surprise, in our view. BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investor call takeaways
ƒ Takeaways from investor call with infrastructure services head
ƒ Strong opportunity; segment growth to outpace company growth
ƒ Segment margin similar to company average, can improve further
ƒ BUY: Likely seasonal weakness in 4Q, but FY12 shaping up well
Increasing segment importance
We hosted an investor call with Mr. P.R.
Krishnan, Head of Infrastructure Services,
TCS. Infrastructure Services contributes
10.5% of TCS’s revenue (3QFY11) and
has grown by an average of 12.8% q-q
over the past five quarters, significantly
higher than company average growth of
6.9%. Management expects the trend to
continue and sees the segment
contribution increasing to 15% by FY14.
Key takeaways from the call
1) The overall market size for
infrastructure services is about USD150b,
and is larger than the opportunity in the applications area. But given
TCS’s asset-light model, its addressable size is slightly more than a third
of that. 2) There are growing end-to-end transformation opportunities in
the market place today, and TCS is establishing itself as a mature player.
Despite stiff competition from global vendors, management believes TCS
has been able to differentiate itself by committing to productivity
improvements, offering innovative engagement models, and delivery from
multiple geographic locations. 3) The strongest demand is from financial
services and healthcare clients. These areas together provide over 70%
of the segment’s FY12 pipeline. 4) Contrary to popular perception,
management pointed out that the segment’s profitability is as strong as
that of the overall business because 70-80% of the services are offered
from offshore centres. In addition, there is scope to increase margins
from innovative pricing models and in-house tools and solutions.
Likely seasonal weakness in 4Q, but retain BUY
Separately, the company indicated that 4Q - a seasonally weak quarter –
has been particularly impacted this year due to heavy RFP (request for
proposal) activity through February. Thus, we believe TCS could report 3-
4% q-q USD revenue growth (versus our expectation of 5-6%). Yet, FY12
is shaping up to be a strong year (we see about 25% revenue growth) for
which hiring continues. As a result, utilisation levels could fall in 4Q,
leading to a likely 100-125bps q-q EBIT margin decline. The margin
enhancement programme is coming to an end, so we see limited upside
to FY12 EBIT margin from the current 27-28% range. That said, TCS
continues to give the clearest message on demand among its peers, and
remains a candidate for FY12 revenue surprise, in our view. BUY.
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