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TCS: :In-line 4Q FY11 results
Good quarter, but in line with
expectations; we see limited
upside in stock
April 21, 2011
Rating
Remains Neutral
Target price
Increased from 1230
INR 1240
Closing price
April 21, 2011
INR 1192
Potential upside +4%
Action: Performance priced in; stay NEUTRAL on limited triggers
TCS posted good but in-line 4Q FY11 results, leaving limited triggers for a
material change in earnings. We believe the performance is largely priced
in, with the stock at 20x FY13F earnings. Maintain NEUTRAL
Catalyst: Growth surprise and higher-than-expected pricing increase
US$ revenue growth in excess of our 25.5% expectation in FY12F,
accompanied by a pricing increase that is higher than our anticipated
1.5% y-y in FY12F.
Expectations not easy to beat
As per our estimates the company would require US$130mn of
incremental revenue to be added every quarter over the next two years,
which we think will not be easy for TCS to beat. Upside on our margin
estimates is unlikely given the higher dependence on volume growth to
protect margins resulting from stretched operational levers.
Maintain NEUTRAL; TP edged up to INR1240
We expect 22.7% US$ revenue CAGR over FY11-13F, with an EBITDA
margin decline of 170bps and an EPS CAGR of 15.5% over this period.
We maintain our NEUTRAL stance on TCS as we see limited upside to
our estimates, and at the current price, the stock is fairly valued at 20x
FY13F earnings. Our TP increases marginally to INR1240 (from INR1230)
on higher other income assumptions. Among tier-1 stocks, we prefer HCL
Tech on better earnings growth and Infosys on valuations that assume
extreme pessimism.
Good quarter, in line with expectations
The trend of positive surprises in TCS’ results has come to a halt with 4Q FY11, after
three consecutive quarters (from 1Q-3Q FY11) of beating consensus revenue or net
profit expectations. TCS delivered an in-line 4Q FY11, with revenue slightly below (4.7%
q-q vs exp of 5.5% q-q) and margins in line with our expectations.
We see limited triggers for a material change in earnings, and believe our revenue and
margin expectations for FY12-13F are not conservative.
Expectations not easy to beat
Revenue growth expectation of 23% CAGR over FY11-13F
To achieve our expectation of a 23% CAGR in revenue growth over FY11-13F, the
company would require US$130mn of incremental revenue to be added every quarter
over the next two years, which we think will not be easy for TCS to beat.
Top client growth slowing down
The top client percentage of revenues has declined (on an LTM basis) by 80bps over the
past four quarters, which suggests to us that growth is slowing in this account. On an
annual basis, the top client grew by 16.5% compared to company growth of 29%. Slow
growth at the top client could pose a risk to TCS’ FY12F revenue growth rate, in our
view; assuming slower growth of 10% at the top client, TCS would have to grow the
remaining business at almost 27% in order to achieve 25% overall growth.
Margin headwinds more in number than tailwinds
Upside to our margin estimates are unlikely, in our view, given the higher dependence
for TCS on volume growth to protect margins resulting from stretched operational levers.
While management is comfortable with 82-84% utilization (excluding trainees), the 4Q
FY11 utilization rate of 82.4% leaves only 140bp scope from the peak. This scope would
be used up in 1Q FY12F to counter the impact of wage hikes, we believe. On the
balance, pricing increase is the only available lever to counter headwinds like currency
and wage hikes.
We assume EBITDA margin dilution of 170bps over FY11-13F, which we believe does
not have much room for upside. Only a pricing increase in excess of the 1.5% y-y we
have assumed each in FY12F and FY13F could provide an upside to our estimate.
Changes to our estimates
We have marginally increased our revenue estimates and now look for US$ revenue
growth of 25.5% and 19.8% in FY12F and FY13F, respectively. Our margin expectations
for FY12F and FY13F are slightly lower due to higher wage increases.
TP raised to INR1,240; maintain NEUTRAL
We expect a 22.7% US$ revenue CAGR over FY11-13F, with EBITDA margin decline of
170bps and an EPS CAGR of 15.5% over the same period. We maintain our NEUTRAL
stance on TCS as we see limited upside to our estimates, and at current prices, we
consider the stock fairly valued at 20x FY13F earnings. Our TP increases marginally to
INR1240 (vs INR1230 earlier) on higher other income assumptions. Among tier-1 stocks,
we prefer HCL Tech (HCLT IN, INR519, BUY) on better earnings growth and Infosys
(INFO IN, INR2,910, BUY) on valuations that assume extreme pessimism.
Valuation methodology & risks
Our target price of INR1,240 is based on 21x FY13F EPS (INR59.2) – which is a 5%
premium to our target multiple for Infosys. Risks to our call on the downside are: 1) a
sharp appreciation of the rupee against the US dollar; and 2) moderation in utilisation
from current levels could provide downside to our margin expectations. On the upside,
risks are: 1) volume growth surprises; and 2) higher-than-anticipated pricing increases.
4Q FY11 results highlights
Volume growth of 2.9%, pricing increase of 0.8%
Revenue growth for 4Q FY11 was marginally below expectations at 4.7% q-q (vs our
estimate of 5.5% and consensus of 5%), with volume growth of 2.9% q-q and pricing
increases of 0.8% q-q. EBITDA margins were in-line with our expectation at 30.3%.
PAT was INR24.0bn (vs our estimate of INR23.8bn) on higher-than-anticipated other
income of INR2.26bn (vs INR1.8bn in 3Q FY11).
Wage hikes at 12-14%
TCS has announced wage hikes of 12-14% at offshore (including promotion), 2-4% at
onsite and 2-10% in global delivery centres. Its wage hikes are comparable to what
Infosys has announced (10-12% excluding promotion).
Pricing increase aids margin increase
Pricing on a constant currency basis increased by 80bps q-q. Management expects
some more pricing increase to flow into FY12F, partly from like-for-like increases and
partly as a result of mix changes.
Hiring guidance for FY12F at 60,000
TCS expects to hire about 60,000 employees in FY12F. The company has given 37,000
offer letters to campus graduates and expects about 25,000 to join.
Segmental performance
Among verticals, manufacturing (9% q-q growth), retail (7.5% q-q) and energy & utilities
(9.4% q-q) led the growth. BFSI grew below the company average at 3.3% q-q.
Among service lines, enterprise solutions (17.7% q-q), BPO (6.5% q-q) and ADM (7.2%
q-q) led growth.
US grew by 4.5% q-q, which was higher than that seen at peer Infosys (flat growth) in
the same quarter
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS: :In-line 4Q FY11 results
Good quarter, but in line with
expectations; we see limited
upside in stock
April 21, 2011
Rating
Remains Neutral
Target price
Increased from 1230
INR 1240
Closing price
April 21, 2011
INR 1192
Potential upside +4%
Action: Performance priced in; stay NEUTRAL on limited triggers
TCS posted good but in-line 4Q FY11 results, leaving limited triggers for a
material change in earnings. We believe the performance is largely priced
in, with the stock at 20x FY13F earnings. Maintain NEUTRAL
Catalyst: Growth surprise and higher-than-expected pricing increase
US$ revenue growth in excess of our 25.5% expectation in FY12F,
accompanied by a pricing increase that is higher than our anticipated
1.5% y-y in FY12F.
Expectations not easy to beat
As per our estimates the company would require US$130mn of
incremental revenue to be added every quarter over the next two years,
which we think will not be easy for TCS to beat. Upside on our margin
estimates is unlikely given the higher dependence on volume growth to
protect margins resulting from stretched operational levers.
Maintain NEUTRAL; TP edged up to INR1240
We expect 22.7% US$ revenue CAGR over FY11-13F, with an EBITDA
margin decline of 170bps and an EPS CAGR of 15.5% over this period.
We maintain our NEUTRAL stance on TCS as we see limited upside to
our estimates, and at the current price, the stock is fairly valued at 20x
FY13F earnings. Our TP increases marginally to INR1240 (from INR1230)
on higher other income assumptions. Among tier-1 stocks, we prefer HCL
Tech on better earnings growth and Infosys on valuations that assume
extreme pessimism.
Good quarter, in line with expectations
The trend of positive surprises in TCS’ results has come to a halt with 4Q FY11, after
three consecutive quarters (from 1Q-3Q FY11) of beating consensus revenue or net
profit expectations. TCS delivered an in-line 4Q FY11, with revenue slightly below (4.7%
q-q vs exp of 5.5% q-q) and margins in line with our expectations.
We see limited triggers for a material change in earnings, and believe our revenue and
margin expectations for FY12-13F are not conservative.
Expectations not easy to beat
Revenue growth expectation of 23% CAGR over FY11-13F
To achieve our expectation of a 23% CAGR in revenue growth over FY11-13F, the
company would require US$130mn of incremental revenue to be added every quarter
over the next two years, which we think will not be easy for TCS to beat.
Top client growth slowing down
The top client percentage of revenues has declined (on an LTM basis) by 80bps over the
past four quarters, which suggests to us that growth is slowing in this account. On an
annual basis, the top client grew by 16.5% compared to company growth of 29%. Slow
growth at the top client could pose a risk to TCS’ FY12F revenue growth rate, in our
view; assuming slower growth of 10% at the top client, TCS would have to grow the
remaining business at almost 27% in order to achieve 25% overall growth.
Margin headwinds more in number than tailwinds
Upside to our margin estimates are unlikely, in our view, given the higher dependence
for TCS on volume growth to protect margins resulting from stretched operational levers.
While management is comfortable with 82-84% utilization (excluding trainees), the 4Q
FY11 utilization rate of 82.4% leaves only 140bp scope from the peak. This scope would
be used up in 1Q FY12F to counter the impact of wage hikes, we believe. On the
balance, pricing increase is the only available lever to counter headwinds like currency
and wage hikes.
We assume EBITDA margin dilution of 170bps over FY11-13F, which we believe does
not have much room for upside. Only a pricing increase in excess of the 1.5% y-y we
have assumed each in FY12F and FY13F could provide an upside to our estimate.
Changes to our estimates
We have marginally increased our revenue estimates and now look for US$ revenue
growth of 25.5% and 19.8% in FY12F and FY13F, respectively. Our margin expectations
for FY12F and FY13F are slightly lower due to higher wage increases.
TP raised to INR1,240; maintain NEUTRAL
We expect a 22.7% US$ revenue CAGR over FY11-13F, with EBITDA margin decline of
170bps and an EPS CAGR of 15.5% over the same period. We maintain our NEUTRAL
stance on TCS as we see limited upside to our estimates, and at current prices, we
consider the stock fairly valued at 20x FY13F earnings. Our TP increases marginally to
INR1240 (vs INR1230 earlier) on higher other income assumptions. Among tier-1 stocks,
we prefer HCL Tech (HCLT IN, INR519, BUY) on better earnings growth and Infosys
(INFO IN, INR2,910, BUY) on valuations that assume extreme pessimism.
Valuation methodology & risks
Our target price of INR1,240 is based on 21x FY13F EPS (INR59.2) – which is a 5%
premium to our target multiple for Infosys. Risks to our call on the downside are: 1) a
sharp appreciation of the rupee against the US dollar; and 2) moderation in utilisation
from current levels could provide downside to our margin expectations. On the upside,
risks are: 1) volume growth surprises; and 2) higher-than-anticipated pricing increases.
4Q FY11 results highlights
Volume growth of 2.9%, pricing increase of 0.8%
Revenue growth for 4Q FY11 was marginally below expectations at 4.7% q-q (vs our
estimate of 5.5% and consensus of 5%), with volume growth of 2.9% q-q and pricing
increases of 0.8% q-q. EBITDA margins were in-line with our expectation at 30.3%.
PAT was INR24.0bn (vs our estimate of INR23.8bn) on higher-than-anticipated other
income of INR2.26bn (vs INR1.8bn in 3Q FY11).
Wage hikes at 12-14%
TCS has announced wage hikes of 12-14% at offshore (including promotion), 2-4% at
onsite and 2-10% in global delivery centres. Its wage hikes are comparable to what
Infosys has announced (10-12% excluding promotion).
Pricing increase aids margin increase
Pricing on a constant currency basis increased by 80bps q-q. Management expects
some more pricing increase to flow into FY12F, partly from like-for-like increases and
partly as a result of mix changes.
Hiring guidance for FY12F at 60,000
TCS expects to hire about 60,000 employees in FY12F. The company has given 37,000
offer letters to campus graduates and expects about 25,000 to join.
Segmental performance
Among verticals, manufacturing (9% q-q growth), retail (7.5% q-q) and energy & utilities
(9.4% q-q) led the growth. BFSI grew below the company average at 3.3% q-q.
Among service lines, enterprise solutions (17.7% q-q), BPO (6.5% q-q) and ADM (7.2%
q-q) led growth.
US grew by 4.5% q-q, which was higher than that seen at peer Infosys (flat growth) in
the same quarter
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