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India Equity Research Reports, IPO and Stock News
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Unabashedly bullish
To continue outperforming peers; revising FY12/13 estimates upwards
Our interaction with the TCS management instilled increased confidence
on sustenance of high growth rates in FY12, comparable with FY11.
We expect TCS to continue outperforming peers in 1QFY12. We estimate
revenue growth at 6.2% v/s our estimate of 4% for Infosys.
We revise our revenue growth estimate for FY12 from 26.6% to 27.5%.
Macro challenges exist, but certainty around demand gives confidence: Our
interaction with the TCS management instilled increased confidence in the strength
of the current demand environment, despite the prevailing headwinds on the macro
front. Barring any Lehman-like system shocks, TCS does not see much else impeding
its growth in FY12. The continued stress in the macro environment seems to have
brought increased focus on operational efficiency, driving clients to look at offshoring
in a big way. This highlights the element of counter cyclicality in the business.
Full year growth could be comparable to FY11; to be more broad-based: TCS'
hiring guidance suggests high-teens volume growth for FY12. However, the company
has high visibility on volume growth of at least 20%. If we assume no further uptick in
realization from 4QFY11 levels, it would imply a 3% YoY increase in realization.
Further, productivity gains should materialize through the course of the year. Given
the outlook on pricing and volumes, we have revised our growth estimate marginally
upwards to 27.5% from 26.6% earlier.
To continue outperforming peers in 1QFY12; expect ~6% revenue growth: We
expect TCS to continue outperforming peers in 1QFY12. We estimate revenue growth
at 6.2%, driven largely by volume growth (v/s our estimate of 4% for Infosys and its
own guidance of 2.6-3.6%). While TCS expects full-year EBIT margin to sustain
around 27%, there may be a decline of ~200bp (from 28%) in 1QFY12 due to the
impact of wage inflation. We are currently modeling EBIT margin decline of 180bp
QoQ to 26.2% for TCS, expecting operating leverage and pyramid to aid margins.
Operational efficiencies to help maintain high-margin profile: TCS expects
utilization excluding trainees to remain at 82-84% for the full year. This is in contrast
to Infosys' guidance for utilization to be ~76%. According to the management, there
is greater certainty in demand as compared to last year. Such a scenario helps to
plan the pyramid and utilization better, in turn leading to healthy margin performance.
Apart from these, (1) scale benefits of growth, (2) continued cost efficiencies, and (3)
pricing uptick will help sustain margins at current levels.
Revising estimates upwards; maintain Neutral: We are incrementally positive on
TCS' ability to sustain growth similar to FY11 in FY12. Accordingly, we revise our
USD revenue growth estimate to 27.5% for FY12 (v/s 26.6% earlier). The stock trades
at 20.7x FY12E and 17.6x FY13E earnings. We maintain Neutral, with a target price
of INR1,230 (20x FY13E earnings).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unabashedly bullish
To continue outperforming peers; revising FY12/13 estimates upwards
Our interaction with the TCS management instilled increased confidence
on sustenance of high growth rates in FY12, comparable with FY11.
We expect TCS to continue outperforming peers in 1QFY12. We estimate
revenue growth at 6.2% v/s our estimate of 4% for Infosys.
We revise our revenue growth estimate for FY12 from 26.6% to 27.5%.
Macro challenges exist, but certainty around demand gives confidence: Our
interaction with the TCS management instilled increased confidence in the strength
of the current demand environment, despite the prevailing headwinds on the macro
front. Barring any Lehman-like system shocks, TCS does not see much else impeding
its growth in FY12. The continued stress in the macro environment seems to have
brought increased focus on operational efficiency, driving clients to look at offshoring
in a big way. This highlights the element of counter cyclicality in the business.
Full year growth could be comparable to FY11; to be more broad-based: TCS'
hiring guidance suggests high-teens volume growth for FY12. However, the company
has high visibility on volume growth of at least 20%. If we assume no further uptick in
realization from 4QFY11 levels, it would imply a 3% YoY increase in realization.
Further, productivity gains should materialize through the course of the year. Given
the outlook on pricing and volumes, we have revised our growth estimate marginally
upwards to 27.5% from 26.6% earlier.
To continue outperforming peers in 1QFY12; expect ~6% revenue growth: We
expect TCS to continue outperforming peers in 1QFY12. We estimate revenue growth
at 6.2%, driven largely by volume growth (v/s our estimate of 4% for Infosys and its
own guidance of 2.6-3.6%). While TCS expects full-year EBIT margin to sustain
around 27%, there may be a decline of ~200bp (from 28%) in 1QFY12 due to the
impact of wage inflation. We are currently modeling EBIT margin decline of 180bp
QoQ to 26.2% for TCS, expecting operating leverage and pyramid to aid margins.
Operational efficiencies to help maintain high-margin profile: TCS expects
utilization excluding trainees to remain at 82-84% for the full year. This is in contrast
to Infosys' guidance for utilization to be ~76%. According to the management, there
is greater certainty in demand as compared to last year. Such a scenario helps to
plan the pyramid and utilization better, in turn leading to healthy margin performance.
Apart from these, (1) scale benefits of growth, (2) continued cost efficiencies, and (3)
pricing uptick will help sustain margins at current levels.
Revising estimates upwards; maintain Neutral: We are incrementally positive on
TCS' ability to sustain growth similar to FY11 in FY12. Accordingly, we revise our
USD revenue growth estimate to 27.5% for FY12 (v/s 26.6% earlier). The stock trades
at 20.7x FY12E and 17.6x FY13E earnings. We maintain Neutral, with a target price
of INR1,230 (20x FY13E earnings).
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