Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Consultancy Services Overweight
TCS.BO, TCS IN
Meeting notes with the CEO: Demand environment
remains solid, and TCS is making the most of it
We met with Mr. N Chandrasekaran, the CEO/MD of TCS. Mr. Chandrasekaran is
confident that TCS can continue to make the most of a strong demand environment
• Demand environment is solid across verticals, horizontals and geographies.
Demand is strong and all-round. TCS is doing well in capturing its share of wallets
from both existing and new clients. Notably, we note that the outlook in BFSI
(financial services), retail, energy and utilities, which have registered abovecompany
average growth, continues to be good, while lagging verticals such as
manufacturing and telecom will strongly participate in FY12 growth. In terms of
service lines, traction continues to be healthy in testing, infra management, BPO (in
all of these service lines, TCS has sector leadership) and discretionary spending is
ticking well (enterprise solutions). In essence, growth is all-round.
• We think FY12 could be as good as FY11 for revenue growth - not factored in
by us or consensus yet. The trick lies in the Compounded Quarterly growth rate
(CQGR) of revenues. To get to 30% USD revenue growth in FY11, TCS would
have to grow 7.8% CQGR through the four quarters of FY11 as the exit rate of
FY10 was less favorable (7.8*4 = 31.2 which is > 30% annual growth in FY11).
Assuming a much more favorable exit rate in 4QFY11, we estimate TCS would
need a CQGR of 6.4% for 30% revenue growth in FY12 (6.4*4 = 25.6 << 30%
annual growth). This implies the CQGR needed for 30% revenue growth in FY12 is
1.5% lower than that needed to achieve the same growth in FY11.
• No slippage in margins; growth at current margins possible. Mr.
Chandrasekaran reiterated that TCS' strong focus on improving margins stays and
the company sees no trade-off between growth and margins. We model in lower than
current EBIT margins (28%). The company maintains that it targets good growth at
27% margins.
• Wage inflation is a function of the demand environment but other factors kick
in to offset impact on margins. TCS believes that wage pressures may be about the
same as in FY11 (the past year) but several factors, namely, good growth, undercheck
attrition, improved pricing, broader pyramid and increasing productivity
should take care of any impact wage pressures might have on margins.
• Investment view: Remain OW on the stock. We believe that there is still room for
TCS' earnings to surprise on the upside (consensus USD revenue growth for FY12 is
at 25-26%). At near-28% EBIT margins, we see scope for our and consensus' FY12
EPS to move up another 3-5%. In our view, potential FY12 EPS upgrade nullifies
concerns on valuation. TCS (OW) remains among our top picks in the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Consultancy Services Overweight
TCS.BO, TCS IN
Meeting notes with the CEO: Demand environment
remains solid, and TCS is making the most of it
We met with Mr. N Chandrasekaran, the CEO/MD of TCS. Mr. Chandrasekaran is
confident that TCS can continue to make the most of a strong demand environment
• Demand environment is solid across verticals, horizontals and geographies.
Demand is strong and all-round. TCS is doing well in capturing its share of wallets
from both existing and new clients. Notably, we note that the outlook in BFSI
(financial services), retail, energy and utilities, which have registered abovecompany
average growth, continues to be good, while lagging verticals such as
manufacturing and telecom will strongly participate in FY12 growth. In terms of
service lines, traction continues to be healthy in testing, infra management, BPO (in
all of these service lines, TCS has sector leadership) and discretionary spending is
ticking well (enterprise solutions). In essence, growth is all-round.
• We think FY12 could be as good as FY11 for revenue growth - not factored in
by us or consensus yet. The trick lies in the Compounded Quarterly growth rate
(CQGR) of revenues. To get to 30% USD revenue growth in FY11, TCS would
have to grow 7.8% CQGR through the four quarters of FY11 as the exit rate of
FY10 was less favorable (7.8*4 = 31.2 which is > 30% annual growth in FY11).
Assuming a much more favorable exit rate in 4QFY11, we estimate TCS would
need a CQGR of 6.4% for 30% revenue growth in FY12 (6.4*4 = 25.6 << 30%
annual growth). This implies the CQGR needed for 30% revenue growth in FY12 is
1.5% lower than that needed to achieve the same growth in FY11.
• No slippage in margins; growth at current margins possible. Mr.
Chandrasekaran reiterated that TCS' strong focus on improving margins stays and
the company sees no trade-off between growth and margins. We model in lower than
current EBIT margins (28%). The company maintains that it targets good growth at
27% margins.
• Wage inflation is a function of the demand environment but other factors kick
in to offset impact on margins. TCS believes that wage pressures may be about the
same as in FY11 (the past year) but several factors, namely, good growth, undercheck
attrition, improved pricing, broader pyramid and increasing productivity
should take care of any impact wage pressures might have on margins.
• Investment view: Remain OW on the stock. We believe that there is still room for
TCS' earnings to surprise on the upside (consensus USD revenue growth for FY12 is
at 25-26%). At near-28% EBIT margins, we see scope for our and consensus' FY12
EPS to move up another 3-5%. In our view, potential FY12 EPS upgrade nullifies
concerns on valuation. TCS (OW) remains among our top picks in the sector.
No comments:
Post a Comment