Tata Consultancy Services -Just good may not be enough:: Standard Chartered Research,

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 4Q financials marginally ahead of our estimates; margin
out-performance helped by currency tailwinds.
 We see volume momentum holding on. But that is built
in the 14%/15% upgrades to consensus FY12/13F EPS
over the past six months, in our view.
 We believe lower intensity of realization growth (+90bp
qoq in 4Q11 versus Infosys’ 210bp) and INR strength
could restrict further revisions. We expect the stock to
remain range-bound in the near term.
 Stay at IN-LINE. PT raised to Rs1,280 (Rs1,170 earlier)
on EPS roll-forward.

revenues grew 4.7% qoq to US$2.24bn, versus our
US$2.21bn estimates, driven by volumes (+2.9%) and
currency moves (+0.9%). EBITDA margin was flat qoq (we
expected 81bp drop) as pull down from lower utilization
(-2% qoq) and higher onsite (+1%) was neutralised by
currency uplift (+58bp). PAT at Rs24.02bn, up 3.1% qoq,
4% above our estimates, helped by higher other income
(Rs2.3bn versus Rs1.4bn est.).
FY12 outlook – We see volume centricity to remain.
While 4Q volume growth was seasonally slower, the
momentum could pick up as client additions remain strong
(+10); 7 large deal wins in 4Q add to the 20 wins over the
last 3 quarters and hiring continues to be robust (6%
addition to 3Q base).
FY11 margin beat – An FY12 encore could be difficult.
Utilisation has limited headroom at 82%+, ex-trainees (TCS’
target band is 82-84%). The targeted 50/50 lateral/fresher
mix (vs. 56/44 in FY11) should keep the trainee bench
higher. 4Q realization growth at 90bp was slower relative to
Infosys’ 2.1%. We believe a sharper pick-up will be critical
to manage margin in an appreciating INR scenario. Our
estimates bake 59bp EBITDA margin drop in FY12 (with 2%
INR appreciation).
Elevated expectations could restrict upside. We raise
our FY12F EPS by 3% to factor in strong volume
momentum. (The sharper 7% increase in FY13 is mainly
due to INR/USD assumption change.) Our price target is
revised to Rs1,280 (24x FY12E EPS) as we roll-forward to
FY11-14 EPS CAGR. Given an expanded valuation
premium versus Infosys (11% on 12-month forward EPS at
current prices), we expect the stock to remain range bound.
Currency moves is the key near-term risk, in our view.


We stay at IN-LINE; price target revised to Rs1,280 (from Rs1,170)
We retain our valuation of TCS at 1.1x FY11-FY14 EPS CAGR. Our price target for the stock is
revised to Rs1,280, adjusting for the changes to our EPS estimates and implies 8.6% total return
(including 1.3% dividend yield) from current levels.


Risks to our estimates and price target
Key downside risks to our price target are: 1) rupee appreciation beyond the levels we assume
and/or adverse cross-currency movements; 2) a slower than anticipated pricing recovery; 3)
delays in the implementation of direct tax code beyond FY12; and 4) strong regulatory action
against outsourcing in TCS’ key geographic markets.
Upside could come from: 1) rupee appreciation slower than the level we assume; 2) faster-than
anticipated recovery in project awards/ramp-ups; large-deal wins ahead of numbers or contract
value factored into our estimates; and 3) acquisitions/large deal wins not built into our model.