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EARNINGS REVIEW
Tata Consultancy Services Ltd. (TCS.BO)
Neutral Equity Research
Inline with expectations: volume surprises, margin disappoints
What surprised us
TCS reported 1QFY12 inline revenues (I-GAAP) of Rs107.97bn (+6.3% qoq)
and net income of Rs24.15bn (-8% qoq). Positives: (1) A broad-based 7.4%
volume growth came as a surprise despite tougher comparisons and
underscores the strength of IT services spending in the sector. (2) 13.1%
qoq growth in telecom vertical was the key differentiator (vs. INFY down
8% qoq, variance of 230 bp growth when compared to INFY) coming from
discretionary spending in the emerging markets. BFSI remained stable at
+4.6% qoq. (3) TCS signed 10 large deals in 1Q and are chasing 15 more;
now have 10 clients with US$100mn+ annual revenues (first time ever).
Negatives: (1) EBIT margin declined by 224 bp qoq (GSe at -150 bp qoq)
due to the full impact of wage hikes. (2) Attrition reached all-time high of
14.8%, despite giving industry leading wage hikes in 1Q, indicating supply
side pressures may not have fully subsided. (3) Utilization rate (incl.
trainees) stretched higher to 76.2%, suggesting limited headroom for
expansion, though mgmt indicated comfort in maintaining the high levels.
What to do with the stock
We maintain Neutral on TCS and our 12-m Director's Cut-based TP of
Rs1,264, implying 12% potential upside. We fine-tune our FY12E-FY14E
EPS. Among the large cap Indian IT stocks, we prefer HCL Tech (HCLT.BO,
Buy, Rs491.20) and Infosys (INFY.BO, Buy, Rs2,740.95), on their higher
earnings growth. TCS is trading at 21X FY12E P/E, at the higher end of its
6-year historical range. Risks: faster economic recovery (upside); currency
volatility (downside)
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