Tata Consultancy Services 4Q: Another strong quarter:: Macquarie Research,

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Tata Consultancy Services
4Q: Another strong quarter
Event
 TCS delivered another quarter of solid growth with a positive surprise on
margins. After an in-line 4Q, we maintain our estimates and target price.
Impact
 Strong demand commentary for FY12. On its earnings conference call, TCS
management made some comments about the demand scenario that give us
confidence in our bullish outlook for FY12. TCS noted on the call that it is currently
pursuing 20+ large material deals; its deal pipeline (both the number and quality
of deals) is currently better than what it was seeing last year and has been
improving on a QoQ basis; it is still far from growth saturation in BFSI vertical.
Even so, the broad nature of the recovery has helped the company to reduce its
dependence on single vertical.

 82-84% new comfort band for utilisation – positive for margins. We
believe that using the twin levers of pricing and utilization would put TCS in a
better position to fight margin headwinds in the next fiscal year. TCS has
indicated that, with an increased employee base, it is comfortable running the
business with a higher utilisation bar. In earlier investor conversations, the
company had indicated it to be in excess of 80%.
 FY12 – another year of strong hiring. TCS added a record 70k employees
in FY11 (vs. start-of-the-year guidance of 30k). The company has already
made 37k campus offers for FY12 and has given initial hiring guidance of 60k
employees. Factoring in the acceptance of ~25k campus freshers, the
company expects to keep the lateral-to-fresher hiring ratio at 50:50 this year.
 Wage hikes announced, better hike than FY11. TCS has announced 12-
14% offshore wage hikes, 2-4% onsite increments and 2-10% emerging
market hikes for FY12. The company implemented a 10-12% offshore hike
last year, and we think its FY12 compensation policy should help the
company keep attrition in check.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,360.00 based on a DCF methodology.
 Catalyst: Large deal wins and an uptick in discretionary spending.
Action and recommendation
 OP maintained. Our preference for the stock has been based on TCS’s
industry-leading volume growth and improving margin performance. The
company has delivered on both counts, and this is reflected in its stock price
performance. We maintain our OP call and recommend accumulating on dips.

4Q FY3/11 Results review and Analysis – Actuals vs expectations


 4Q results in line with Street expectations: Revenue of Rs101.5bn (up 5% QoQ and 31% YoY)
was in line with our estimates. EBITDA of Rs30.7bn (up 5% QoQ and 33% YoY) was 2% above our
estimate, and PAT of Rs24bn (up 3% QoQ and 24% YoY) came in 6% above our expectations.
 Volume growth and stable pricing in 4Q. TCS reported 2.9% QoQ volume growth this quarter
(vs -1.4% at Infosys). Pricing grew 80ppts on a blended basis (vs 2.1% pricing uptick at Infosys).
Management expects the potential uptick in pricing to continue in FY12. (For detailed 4Q P&L and
operating metrics for Infosys, please see pages 5–6.)
 Margins remain flat even as growth continues. We had anticipated margins to fall 100bp QoQ
as significant hiring would have moderated margins. Nevertheless, the company reported a 6bps
decline in operating margins to 28% (vs 28.1% in 3Q) in comparison to a 120bps decline for
Infosys during 4Q FY11. Key moving parts for margin movement this quarter were: 130bp due to
forex movement, 10bp due to increased off-shoring, 80bps for rate productivity and 290bps
due to volume growth.


 Utilization easing off in 4Q; absolute attrition stabilizing. We note that utilization (ex-trainees)
for TCS dropped to 82.8% (vs 83.8% in 3Q). Attrition came in at 14.4% (flat QoQ) on an LTM
basis. Utilization (including trainees) dropped to 75.1% from 77.1% in 3Q.