Tata Consultancy Services: In-line with expectations: Sustained earnings priced in::, Goldman Sachs

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Tata Consultancy Services Ltd. (TCS.BO)
Neutral Equity Research
In-line with expectations: Sustained earnings priced in, stay Neutral
What surprised us
TCS reported 4QFY11 in-line revenues (I-GAAP) of Rs101.6 bn and net
income of Rs26.2bn (+10.7% qoq). Revenues were up 5.1% qoq led by
2.9% volume growth. EBIT margins remained stable despite decline in
utilization rate by 200 bp to 75.1%. Higher non-operating income (Rs2.4 bn)
and lower tax rate (14.9%) contributed to EPS beat. BFSI growth was softer
at 3.7% qoq; telecom declined 2.8% qoq, similar to INFY/HCLT, suggesting
it to be an industry-wide trend. TCS added 11k billable employees in 4Q;
highest net additions ever, implying strong revenue growth
expectations and a robust deal pipeline, in line with our expectations for
the sector. TCS ended FY11 with 70k gross hires and guided for 60k gross
hiring for FY12, implying 18%-19% growth in billable employee base (vs.
21% for INFY). Management also suggested an uptick in pricing driven
by a strong demand environment.TCS announced offshore wage hikes
of 12%-14%, higher than 10%-12% by INFY, indicating competition and
wage inflation pressures may have not fully subsided.

What to do with the stock

We maintain Neutral on TCS and our 12-m Director's Cut-based TP of
Rs1,264, implying 6% potential upside. We fine-tune our FY11E-FY13E EPS
and introduce FY14E EPS of Rs74.32. Among the large cap Indian IT stocks,
we prefer HCL Tech (HCLT.BO, Buy, Rs518.65) and Infosys (INFY.BO, Buy,
Rs2,909.25), on their higher earnings growth. TCS is currently trading at
22.4X FY12E P/E, at the higher end of its 6-year historical range. Risks:
faster economic recovery (upside); currency volatility (downside).