TCS - OW with a TP of INR1,300; HSBC Research,

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TCS
 Better deal/project structuring and cost rationalisation highlights of
TCS’s out-performance in 2010
 Expect continued strength in 4Q11 as well
 Remain OW with a TP of INR1,300
Star of 2010
TCS has significantly outperformed peers in 2010,
both in terms of top-line growth and profitability.

Inline with the company’s operational performance,
the stock’s out-performance has been
commensurate. We expect TCS to continue to grow
strongly, better than peers in 4QFY11 as well. The
company recruited nearly 12,500 of net employees
in 3QFY11 (7.2% q-o-q growth), compared to near
5,300 by Infosys (4.3% q-o-q), Wipro 3,600 (3.1%
q-o-q) and HCLT 2,000 (2.9% q-o-q).
TCS has reaped the benefits of its 2008
restructuring, where the company started to
provide higher focus on the vertical business lines
and provided P&L responsibility to the vertical
heads. Peers, such as Wipro, are following the
structure now.
Growth has not come by compromising
profitability
While TCS has reported steller growth in the
recent quarters, we believe the adjoining
improvement in profitability warrants higher
credit. TCS has expanded EBITDA margins by
near 450bps in the past seven quarters.


We believe, this improvement in profitability has
been driven by multiple reasons:
 Better deal structuring: The company has
improved its onshore/offshore mix by more
than 1,000bps since 1QFY09 in favour of
offshore and fixed price project contribution
to 50%, +690bps in the same period. This also
illustrates TCS’s ability and willingness to
share higher risk with its clients and
confidence in its delivery strength.
 Cost rationalisation: TCS has been able to
reduce its sales offices from 169 to 142 in the
past few years, thereby increasing the sales
productivity. Secondly, the company has
improved revenue per client over the past few
quarters. Better client mining usually provides
SG&A leverage and therefore margin
improvement.
Valuation
We expect TCS to continue to grow strongly in
FY12. We forecast USD revenues growth of 27%
in FY12 and stable EBITDA margin at 29.6%.
We continue to value TCS at 22x CY12e EPS at
INR1,300.
Risks
Macro-economic slowdown, wage inflation and
stronger competition from peers are the primary
risks to our OW thesis.