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Tata Consultancy
Macro head winds have not
dented mgmt confidence;
Stretched valuations = EW
Quick Comment: Despite a string of negative data
around the US economy, TCS management did not
sound too perturbed about its growth visibility. Though
cautious on the macro environment, TCS continues to
see strong growth in key verticals like Banking and
Retail. Trends in IT spending for manufacturing in US
are encouraging and Telecom could be the only vertical
that would lag company growth in FY12 as per mgmt.
What's new: We met Mr S Mahalingam, CFO of TCS.
We believe as of now, TCS has good visibility for
~20-25%yoy US$ revenue growth in FY12e. Given the
current headwinds of currency, wage hikes, investments
in new initiatives (e.g. Cloud) and onsite hiring, TCS
should be able to hold EBIT margins above the 27%
mark in FY12e (27.8% in FY11) in our view. We believe
TCS may also need to increase its FY gross hiring target
from 60k to ~65-70k.
What is keeping management confident? A
combination of revival in discretionary spending and
benign pricing environment supports management
confidence in our view. TCS has seen a pick-up in
discretionary spending across verticals in its client base.
Pricing discussions are benign and the majority of
pricing negotiations have yielded favorable results for
TCS so far in the current year.
What does it mean for the stock? We believe TCS
stock is richly valued and will stay range bound for the
rest of 2011. The stock trades at 23x FY12e EPS for
15%yoy EPS growth, at 18-25% premium to peers.
Key Risks: Though consensus is forecasting
US$ revenue growth of 26% yoy which is in-line with our
estimates, street margin assumptions (flat yoy) for TCS
are stretched in our view and leave no room for
management to moderate margins or EPS growth in
FY12e in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Consultancy
Macro head winds have not
dented mgmt confidence;
Stretched valuations = EW
Quick Comment: Despite a string of negative data
around the US economy, TCS management did not
sound too perturbed about its growth visibility. Though
cautious on the macro environment, TCS continues to
see strong growth in key verticals like Banking and
Retail. Trends in IT spending for manufacturing in US
are encouraging and Telecom could be the only vertical
that would lag company growth in FY12 as per mgmt.
What's new: We met Mr S Mahalingam, CFO of TCS.
We believe as of now, TCS has good visibility for
~20-25%yoy US$ revenue growth in FY12e. Given the
current headwinds of currency, wage hikes, investments
in new initiatives (e.g. Cloud) and onsite hiring, TCS
should be able to hold EBIT margins above the 27%
mark in FY12e (27.8% in FY11) in our view. We believe
TCS may also need to increase its FY gross hiring target
from 60k to ~65-70k.
What is keeping management confident? A
combination of revival in discretionary spending and
benign pricing environment supports management
confidence in our view. TCS has seen a pick-up in
discretionary spending across verticals in its client base.
Pricing discussions are benign and the majority of
pricing negotiations have yielded favorable results for
TCS so far in the current year.
What does it mean for the stock? We believe TCS
stock is richly valued and will stay range bound for the
rest of 2011. The stock trades at 23x FY12e EPS for
15%yoy EPS growth, at 18-25% premium to peers.
Key Risks: Though consensus is forecasting
US$ revenue growth of 26% yoy which is in-line with our
estimates, street margin assumptions (flat yoy) for TCS
are stretched in our view and leave no room for
management to moderate margins or EPS growth in
FY12e in our view.
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