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Tata Consultancy
Strong revenue growth,
change to IFRS and higher
other income drive net profits
Quick Comment: TCS reported strong 7.4% qoq
revenue growth and higher than expected EBIT margin
decline of -214bps qoq. Reported IFRS EBIT was in line
with our expectations, but on a like-to-like accounting
basis, we think EBIT might have been in line with/lower
than our US GAAP estimates (purely judging by trends
in US GAAP vs. IFRS financials for 1Q-4QFY11). Higher
other income and accounting change mainly drove the
1QFY12 net profit beat, in our view.
Strong revenue growth – a highlight of Jun-11
results – would outweigh accounting changes: The
strong revenue growth US$ 2,412 (+7.5%qoq,
+34.4%yoy) for TCS was ahead of our and Street
expectations. It now makes even 30%+ yoy revenue
growth for TCS appear achievable in FY12e. It also
increases our conviction in our Street-high revenue
forecast for Infosys in FY12e (see Exhibits 6-7).
Reported EBIT margins at 26.2% (-214bps qoq, -130bps
yoy) were lower than our expectations. Overall net
income of Rs23.8bn (flat qoq, +28% yoy) was ahead of
our estimates due to higher than expected other
income/Fx gains during the quarter. We are reviewing
our model to ascertain the impact of change in
accounting to IFRS on our forecasts.
Con-call takeaways: TCS management indicated that
despite the uncertain macro environment, its clients
have not cut budgets or cancelled any projects so far;
neither has it seen any deal-related delays. Its
discretionary pipeline remains strong and TCS closed
10 large deals during the quarter. TCS plans to hire
17-20k gross employees in 2Q.
Maintain EW: We believe the strong revenue growth on
a higher base could support TCS stock price and
premium multiples in the near term. However, muted
margin performance in Q1 would limit consensus EPS
upgrades in our view.
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