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TCS (TCS BO)
OW: Strong 4Q, well on track for a strong FY12 too
Continued robust hiring, along with strong margin
performance, was the highlight of the quarter
Demand outlook remains positive and management is
confident of maintaining margins in FY12, on the back of
pricing improvements
We remain OW, and raise our TP to INR1,360 (from INR1,300)
TCS reported yet another strong quarter with revenues of USD2,244m, +4.7% q-o-q,
driven by 2.9% volume growth and a 0.8% increase in pricing. EBIT margins declined by
a modest 6bp to 28% vs our expectation of a 68bp decline. Net hiring in the quarter of
11,700 (+6.3% q-o-q) was noteworthy, particularly as it was following robust 6.5% and
7.2% growth in 3Q/2Q.
Growth momentum intact, profitability levels reassured: Management reaffirmed a
strong demand momentum as clients are now looking to start new growth and long-term
initiatives, and are not just focused on cost cutting. Driven by higher growth in discretionary
services, the company expects pricing to improve as well in FY12. The qualified pipeline
has grown over the year and TCS has been one of the top-15 global vendors in terms of deal
wins in 4Q; the company signed seven large deals in 4Q. On profitability, management
expects utilisation to remain sustainably high in the 82-84% range, owing to scale benefits,
and therefore expects to maintain FY11 profitability levels in FY12 as well. Headcount
guidance is 60,000 for FY12 (gross), including fresh campus hires of 35,000.
Valuation: We remain OW on the stock but believe earnings upside from current estimates is
unlikely. However, considering the strong demand outlook and high visibility, current
valuations are unlikely to shrink and therefore stock returns should be at least in line with
earnings FY11-13e CAGR of c22% for TCS (including the impact of a one-off tax increase in
FY12). We roll our estimates over to FY13, valuing the company at 22x (at a 10% premium to
Infosys (INFY.BO, INR2,909, OW) owing to its better operational performance) our FY13e
EPS of INR61.57, and revise our TP to INR1,360 (from INR1,300).
4QFY11 highlights
TCS has reported yet another strong quarter with revenues of USD2,244m (+4.7% q-o-q), modestly
above our estimate of USD 2,231m. In INR terms, revenues grew 5.1% q-o-q to INR101.6bn.
The robust rise in revenue was because of strong volume growth (2.9% q-o-q) and a pricing improvement
of 80bp compared with 3Q11. The pricing increase comes on the back of a 180bp q-o-q rise in pricing in
the previous quarter.
Management showed optimism for FY12 with a strong deal pipeline (chasing 20 large size deals) and
guidance to a 60,000 gross headcount addition. Utilisation is expected to increase in the next quarter as
the large number of trainees currently on bench is expected to become billable. Management guided an
increase in pricing post 1Q12 owing to strong demand and stronger growth in discretionary services.
Growth came from across geographies. The majority of incremental revenues came from North
America, growing +4.9% q-o-q, and Continental Europe, up +11.9% q-o-q. Latin America bounced back
with 8.5% sequential growth, while APAC, up 9.7% q-o-q, continued to perform well (+57% y-o-y for
FY11). The UK rose 1.8% and India was up 0.5%, relatively muted performances. Most sectors delivered
upper-single-digit growth, except Telecom, which continued to be the laggard. The company added a net
11,700 employees, taking its total headcount to 198,614. Attrition remained flat and is reported to be
14.4% (LTM). Utilisation rates excluding trainees slipped 140bp from 83.8% in Q2FY11 to 82.4%.
Valuation
We remain OW on the stock but believe earnings upside potential from current estimates is unlikely.
However, considering the strong demand outlook and high visibility, we believe current valuations are
unlikely to shrink and therefore stock returns should be at least in line with earnings FY11-13e CAGR of
c22% for TCS (including the impact of a one-off tax increase in FY12). We roll over our estimates to
FY13e and value the company at 22x (a 10% premium to Infosys owing to its better operational
performance) our FY13e EPS of INR61.6 and revise our TP to INR1,360 (from INR1,300). At the current
stock price this translates to an upside potential of 17% (including dividend yield).
Risks
In our view, wage inflation and a macroeconomic slowdown represent the primary downside risks to our
Overweight rating on TCS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS (TCS BO)
OW: Strong 4Q, well on track for a strong FY12 too
Continued robust hiring, along with strong margin
performance, was the highlight of the quarter
Demand outlook remains positive and management is
confident of maintaining margins in FY12, on the back of
pricing improvements
We remain OW, and raise our TP to INR1,360 (from INR1,300)
TCS reported yet another strong quarter with revenues of USD2,244m, +4.7% q-o-q,
driven by 2.9% volume growth and a 0.8% increase in pricing. EBIT margins declined by
a modest 6bp to 28% vs our expectation of a 68bp decline. Net hiring in the quarter of
11,700 (+6.3% q-o-q) was noteworthy, particularly as it was following robust 6.5% and
7.2% growth in 3Q/2Q.
Growth momentum intact, profitability levels reassured: Management reaffirmed a
strong demand momentum as clients are now looking to start new growth and long-term
initiatives, and are not just focused on cost cutting. Driven by higher growth in discretionary
services, the company expects pricing to improve as well in FY12. The qualified pipeline
has grown over the year and TCS has been one of the top-15 global vendors in terms of deal
wins in 4Q; the company signed seven large deals in 4Q. On profitability, management
expects utilisation to remain sustainably high in the 82-84% range, owing to scale benefits,
and therefore expects to maintain FY11 profitability levels in FY12 as well. Headcount
guidance is 60,000 for FY12 (gross), including fresh campus hires of 35,000.
Valuation: We remain OW on the stock but believe earnings upside from current estimates is
unlikely. However, considering the strong demand outlook and high visibility, current
valuations are unlikely to shrink and therefore stock returns should be at least in line with
earnings FY11-13e CAGR of c22% for TCS (including the impact of a one-off tax increase in
FY12). We roll our estimates over to FY13, valuing the company at 22x (at a 10% premium to
Infosys (INFY.BO, INR2,909, OW) owing to its better operational performance) our FY13e
EPS of INR61.57, and revise our TP to INR1,360 (from INR1,300).
4QFY11 highlights
TCS has reported yet another strong quarter with revenues of USD2,244m (+4.7% q-o-q), modestly
above our estimate of USD 2,231m. In INR terms, revenues grew 5.1% q-o-q to INR101.6bn.
The robust rise in revenue was because of strong volume growth (2.9% q-o-q) and a pricing improvement
of 80bp compared with 3Q11. The pricing increase comes on the back of a 180bp q-o-q rise in pricing in
the previous quarter.
Management showed optimism for FY12 with a strong deal pipeline (chasing 20 large size deals) and
guidance to a 60,000 gross headcount addition. Utilisation is expected to increase in the next quarter as
the large number of trainees currently on bench is expected to become billable. Management guided an
increase in pricing post 1Q12 owing to strong demand and stronger growth in discretionary services.
Growth came from across geographies. The majority of incremental revenues came from North
America, growing +4.9% q-o-q, and Continental Europe, up +11.9% q-o-q. Latin America bounced back
with 8.5% sequential growth, while APAC, up 9.7% q-o-q, continued to perform well (+57% y-o-y for
FY11). The UK rose 1.8% and India was up 0.5%, relatively muted performances. Most sectors delivered
upper-single-digit growth, except Telecom, which continued to be the laggard. The company added a net
11,700 employees, taking its total headcount to 198,614. Attrition remained flat and is reported to be
14.4% (LTM). Utilisation rates excluding trainees slipped 140bp from 83.8% in Q2FY11 to 82.4%.
Valuation
We remain OW on the stock but believe earnings upside potential from current estimates is unlikely.
However, considering the strong demand outlook and high visibility, we believe current valuations are
unlikely to shrink and therefore stock returns should be at least in line with earnings FY11-13e CAGR of
c22% for TCS (including the impact of a one-off tax increase in FY12). We roll over our estimates to
FY13e and value the company at 22x (a 10% premium to Infosys owing to its better operational
performance) our FY13e EPS of INR61.6 and revise our TP to INR1,360 (from INR1,300). At the current
stock price this translates to an upside potential of 17% (including dividend yield).
Risks
In our view, wage inflation and a macroeconomic slowdown represent the primary downside risks to our
Overweight rating on TCS.
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