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For 1QFY2012, TCS reported strong set of numbers, outperforming our as well
as street expectations. The major highlight of the result was the 7.4% qoq volume
growth. Management has highlighted robust growth outlook for FY2012, with the
deal pipeline being strong and discretionary spend coming in. TCS continues to
remain our preferred pick along with HCL Tech in the IT pack. We maintain our
Buy rating on the stock.
Quarterly highlights: For 1QFY2012, TCS posted revenue of US$2,412mn, up
7.5% qoq, majorly led by volume growth. This is second best quarter where the
company reported qoq incremental revenue of US$168mn (after US$210mn in
2QFY2011). In rupee terms, revenue came in at `10,797cr, up 6.3% qoq.
EBITDA and EBIT margin of the company declined by 233bp and 214bp qoq,
respectively, due to wage hikes given in 1QFY2012, effective from April 1, 2011.
PAT came in at `2,380cr, almost flat qoq despite margin headwinds on the back
of higher other income due to forex gain of `79cr on hedges resulting in total
income yield of `289cr as against `224cr in 4QFY2011.
Outlook and valuation: Management has highlighted that the demand
environment is upbeat and it is chasing 15 large broad-based deals.
Management maintained its robust hiring guidance of 60,000 gross additions for
FY2012 and expects a like-to-like pricing increase in the far end of FY2012.
Even with such aggressive hiring plans, management targets to maintain the
utilisation levels excluding trainees at 82–84% in FY2012. Thus, over
FY2011–13E, we expect the company’s revenue to post a 21.7% CAGR (INR
terms) and a 24% CAGR (USD terms), surpassing the US$10bn revenue mark in
FY2012 itself. On the back of 1) strong growth expectations, 2) headroom to
scale up utilisations including trainees to 77% by FY2013 and 3) SGA expense
optimisation as a strong lever, we expect the company to swiftly counter the
headwinds of aggressive wage hike. We expect EBIT margin’s downside to be
limited to 108bp yoy and settle at 27% by FY2013. We value TCS at 22x (10%
premium to Infosys) FY2013E EPS of `62.2 with a target price of `1,368 and
maintain our Buy rating on the stock.