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Tata Consultancy
Staying on top
TCS delivered another strong quarter, with broad-based revenue growth of 7.5%
qoq in US$ terms, with margins meeting expectations. We expect TCS to remain
ahead of the curve on top-line growth, which can sustain the premium valuations
that it currently enjoys. Reiterate Buy.
Another strong quarter; we expect valuation premiums to be sustained
TCS again delivered a strong performance ñ US$ qoq revenue growth of 7.5%, which was
broad-based across most verticals, geographies and service lines. Managementís
assessment of the demand environment was uniformly bullish, highlighted by: 1) an increase
in the discretionary component of the deal pipeline; 2) strong demand in Europe (6.6% qoq
growth); and 3) client execution on projects on track despite macro concerns. Even with large
deal traction, TCS closed 10 deals in 1Q12 and its deal pipeline remains healthy across
verticals and markets. We raise our FY12 and FY13 EPS forecasts 1.8% and 1.4%,
respectively, given the companyís good performance and confident outlook. We expect TCS
to sustain its valuation premium in the sector, given consistently higher profitable growth
despite its high revenue base.
1Q12 revenues: broad-based growth is impressive on many counts, in our view
TCSís 1Q12 revenues grew 7.5% qoq to US$2.41bn (6.2% in constant currency terms),
exceeding our forecast of 5.8%. Volume growth was 7.4% qoq, but realisation (ex-currency)
was 0.5% lower qoq, partly due to higher growth outside developed markets. International
revenues rose 6.9% qoq (RBS forecast: 5.6%). Nearly all geographies, verticals and service
lines grew qoq, which we believe signals broad-based demand traction and strong execution.
1Q12 margin on expected lines ñ strong show of confidence on FY12
The EBIT margin was expectedly down 214bp qoq to 26.2% under IFRS (RBS US GAAP
forecast: 26.1%) due to the impact of salary hikes (-251bp), higher SG&A costs (-76bp) and
forex (-9bp), partly mitigated by realisation/productivity/offshoring (+122bp). Management
expressed confidence in sustaining the EBIT margin at least at 27% in FY12 (28.1% in
FY11), and has more confidence on a pricing tailwind in coming quarters, although price
increases are being pushed back. ëOther incomeí rose 28.9% to Rs2.89bn due to forex gains
(qoq change of Rs910m) and higher treasury yields. Consequently, PAT was flat at
Rs23.8bn despite significant margin compression.
Staying on top
We raise our FY12 and FY13 revenue forecasts 1.7% and 1.6%, respectively, and our EPS
forecasts 1.8% and 1.4%, given the broad-based growth in 1Q12 and managementís
confident outlook. We reiterate Buy, with a target price of Rs1,350.
Raising our FY12/13F EPS 1.8%/1.4%, driven by revenue outperformance forecast for 1Q13
We raise our FY12 and FY13 revenue forecasts 1.7% and 1.6%, respectively, given significant
outperformance and all-round growth in 1Q12, as well as the companyís confident stance on
growth. Our FY12 and FY13 EBITDA margin forecasts are marginally adjusted downward by 38bp
and 40bp, respectively. We also marginally raised our tax rate assumption to bring it in line with
management guidance, and raised our ëother incomeí forecasts to factor in higher FX gains largely
in 1Q12. Consequently, our FY12 and FY13F EPS forecast rise 1.8% and 1.4%, respectively.
We maintain our PE-based target price of Rs1,350, which implies an FY13F target multiple of 22x,
given a consistently impressive operational performance, despite a high revenue base. We expect
the companyís strong revenue performance to continue in FY12. At our target price, we continue
to value the stock at an 11% FY13F PE premium to Infosys, our sector valuation benchmark,
given the consistently better operating performance shown by TCS.
Note that we changed our Income Statement to IFRS accounting standards effective FY11,
considering the transition of reported financials from US GAAP to IFRS accounting standards.
Key risks to our rating and price target
Key downside risks to our peer relative PE-based target price are: 1) any deterioration in macro
economic conditions in developed markets; 2) rupee appreciation beyond the levels that we
assume and/or adverse cross-currency movement; 3) lower pricing than that built into our
assumptions; and 4) strong regulatory action against outsourcing in TCS' key geographic markets.
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