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● Management remains optimistic on the demand environment. The
company is seeing both discretionary and non-discretionary spend
panning out as per internal expectations, despite the weak
macroeconomic data recently.
● Margins could sustain since wage inflation pressures are likely to
be offset by pyramidisation effects given the strong growth.
Management is also positive on the pricing outlook.
● The company remains on track on its plans to grow cloud
revenues. Management indicated that by 4Q FY12, cloud should
contribute 10% of incremental revenue. While the business
models are still in ‘beta’ stage, it expects steady-state margins
from such initiatives to be higher than the company average.
● We remain positive on the long-term prospects of TCS. However,
we believe that this is fully priced in and that there is no catalyst in
the near term. We thus expect the stock to continue to trade in a
range. We assume coverage with a NEUTRAL rating and a 12-
month target price of Rs1,275.
We spoke to Mr Kedar Shirali, Head, Investor Relations, for an update
on the company.
TCS maintains an optimistic view on demand
Management remains quite optimistic on the demand environment. It
indicated that it continues to see demand for projects focussed on
improving operational efficiency as well as transformational projects.
Despite the poor macroeconomic data from the US recently, client
spending has been in line with their IT budgets, and thus
management’s conviction about strong growth in FY12 has actually
increased since the beginning of the year.
Margin pressures manageable
Management indicated that it was habituated to headline wage
inflation of 10-15% p.a. and that the resulting margin pressures should
be offset by benefits of pyramidisation.
Management also commented that the pricing environment was
strong. While small price increases could continue over the next few
quarters, the bulk of price increases are likely to come towards endFY12.
On-track with respect to cloud offerings
Revenue from process clouds and iON, the cloud offering for SMBs,
are on track to contribute 10% of incremental revenue by 4Q FY12. At
that stage, the company will report financial details of this segment
separately.
Management indicated that it was still tweaking its business model but
expected steady-state margins from such initiatives to be higher than
the company average. These initiatives could also help the company
continue to grow revenue strongly without hitting supply-side
bottlenecks.
Looking for attractive acquisitions, no larger than US$0.5 bn
Management continues to scout for attractive acquisition targets that
offer scale in under-penetrated geographies such as Japan, Germany
and France, and add domain expertise or intellectual property,
especially in the area of process cloud.
Mr Shirali also commented that the company is unlikely to acquire a
target of size larger than its 2008 acquisition of Citigroup’s captive
BPO (now renamed TCS e-serve), which was for US$505 mn.
Retain NEUTRAL
Management commentary and our own channel checks make us
confident of our FY12 USD-revenue growth estimate of 27%. We
expect an 80 bp EBIT margin dip YoY to 27%.
We remain positive on the long-term prospects of the business model
and agree with management’s strategy to boost revenue from nonlinear initiatives.
In our view, the positives are fully priced in the stock. Further, the lack
of any catalyst in the near term makes us believe that the stock will
continue to trade in a range. We therefore assume coverage with a
NEUTRAL rating and a 12-month target price of Rs1,275.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Management remains optimistic on the demand environment. The
company is seeing both discretionary and non-discretionary spend
panning out as per internal expectations, despite the weak
macroeconomic data recently.
● Margins could sustain since wage inflation pressures are likely to
be offset by pyramidisation effects given the strong growth.
Management is also positive on the pricing outlook.
● The company remains on track on its plans to grow cloud
revenues. Management indicated that by 4Q FY12, cloud should
contribute 10% of incremental revenue. While the business
models are still in ‘beta’ stage, it expects steady-state margins
from such initiatives to be higher than the company average.
● We remain positive on the long-term prospects of TCS. However,
we believe that this is fully priced in and that there is no catalyst in
the near term. We thus expect the stock to continue to trade in a
range. We assume coverage with a NEUTRAL rating and a 12-
month target price of Rs1,275.
We spoke to Mr Kedar Shirali, Head, Investor Relations, for an update
on the company.
TCS maintains an optimistic view on demand
Management remains quite optimistic on the demand environment. It
indicated that it continues to see demand for projects focussed on
improving operational efficiency as well as transformational projects.
Despite the poor macroeconomic data from the US recently, client
spending has been in line with their IT budgets, and thus
management’s conviction about strong growth in FY12 has actually
increased since the beginning of the year.
Margin pressures manageable
Management indicated that it was habituated to headline wage
inflation of 10-15% p.a. and that the resulting margin pressures should
be offset by benefits of pyramidisation.
Management also commented that the pricing environment was
strong. While small price increases could continue over the next few
quarters, the bulk of price increases are likely to come towards endFY12.
On-track with respect to cloud offerings
Revenue from process clouds and iON, the cloud offering for SMBs,
are on track to contribute 10% of incremental revenue by 4Q FY12. At
that stage, the company will report financial details of this segment
separately.
Management indicated that it was still tweaking its business model but
expected steady-state margins from such initiatives to be higher than
the company average. These initiatives could also help the company
continue to grow revenue strongly without hitting supply-side
bottlenecks.
Looking for attractive acquisitions, no larger than US$0.5 bn
Management continues to scout for attractive acquisition targets that
offer scale in under-penetrated geographies such as Japan, Germany
and France, and add domain expertise or intellectual property,
especially in the area of process cloud.
Mr Shirali also commented that the company is unlikely to acquire a
target of size larger than its 2008 acquisition of Citigroup’s captive
BPO (now renamed TCS e-serve), which was for US$505 mn.
Retain NEUTRAL
Management commentary and our own channel checks make us
confident of our FY12 USD-revenue growth estimate of 27%. We
expect an 80 bp EBIT margin dip YoY to 27%.
We remain positive on the long-term prospects of the business model
and agree with management’s strategy to boost revenue from nonlinear initiatives.
In our view, the positives are fully priced in the stock. Further, the lack
of any catalyst in the near term makes us believe that the stock will
continue to trade in a range. We therefore assume coverage with a
NEUTRAL rating and a 12-month target price of Rs1,275.
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