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Tata Consultancy Services (TCS.BO)
Steady Quarter; Operating Results In Line
Revenue ahead… — Revenue growth was 7.5% qoq ($-terms) – India did well with
~12% qoq growth while international revenues increased by 6.9% ($-terms). Volumes
increased ~7.4% while pricing was down ~50bps qoq. Constant currency revenue
growth was ~6.2% qoq. Growth was well spread across verticals and service lines.
...Margins slightly lower than expected; Operating profits in line — EBIT margins
declined ~210bps qoq (26.2% for Q1), slightly ahead of expectations, resulting in
operating profits being in line. Wage hikes were taken in April – some additional cost of
promotions should come in Q2.
Management commentary — (1) Management suggested that business outlook is
steady despite uncertain macro (2) Deal pipeline good and well balanced across
geographies/sectors (3) 10 large deals signed in the quarter – several are
transformational deals (4) Discretionary spend is doing well (5) Visas not an issue
incrementally – rejection rates flat qoq although higher yoy (6) Full year gross hiring
outlook maintained at ~60k employees (7) 1Q net hiring was ~3,600 employees.
Key sectoral trends from INFY/TCS results — (1) Pricing has surprised a little
negatively, particularly given the environment – most investors were expecting a pricing
uptick (2) Divergent comments on discretionary spends – TCS sounded a lot more
positive and indicated that there were no deferrals (3) TCS did better on
Europe/Telecom segment; TCS’ emerging market presence also helping.
Estimates largely unchanged; Maintain Hold — Our EBITDA estimates are
unchanged post Q1 – profits for FY12/13 goes up by ~2%/1% largely due to change in
other income assumptions. While results are better than Infosys but this is the second
consecutive quarter of lack of positive surprises – which is required for the stock to
move up meaningfully, given valuations of ~21x FY12E. With worsening macro and
high expectations, we maintain Hold on the stock.
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