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... the tough get going
ƒ Solid 1Q with revenue and EPS ahead of our and Street view
ƒ Minor EBIT miss not a worry as wage hikes now out of the way
ƒ Stength in difficult areas - Europe and telecom - key positives
ƒ BUY, expect TCS to benefit disproportionately relative to peer
Solid revenue quarter
TCS reported a solid 1QFY12 with
revenue and EPS above our and
consensus estimates, even though wage
hikes in the quarter meant EBIT came in
marginally below our expectations.
However, with wage pressures out of the
way for the year and mostly lower cost
graduate additions ahead, we believe
recouping margins should not be a worry.
Instead investor focus should be on the
strong revenue performance (+7.4% q-q
in USD terms vs BNPP: 6.2%) despite an
uncertain macro environment and when
peer Infosys reported only 4.3%.
Growth in Europe and telecom key positives
Among the key positives for us, was that management expects continued
growth in Europe (+6.6% q-q, 25% of revenue) despite continued macro
worries in the region. In fact, of about 15 large deals in TCS’s pipeline,
eight are from the UK and Europe. In addition, telecom (12% of revenue)
which most peers have singled out as a problem area grew 14.3% q-q
because of TCS’s emerging market focus.
Key numbers versus our view
TCS’s 1QFY12 revenue was up 7.4% in USD terms and 6.3% in INR
terms and was ahead of our and Street estimates by about 1.2-1.4%.
Revenue growth was helped somewhat by a 12.2% q-q spurt in lumpy
India revenue (9% of total). EBIT missed our estimate marginally despite
the revenue beat because of wage hikes. Net profit was above our and
Street estimate by 2-5% on higher other income.
TCS remains our top large-cap pick
We continue to like TCS because we believe its scale, well-settled
organization, management structure and much improved sales efforts
over the past couple of years will ensure it continues to benefit
disproportionately relative to its peers. With a strong 1Q performance, we
believe the company has eased out the asking rate for the remaining
three quarters to meet consensus estimates and remains a candidate for
an FY12 earnings surprise. Risks: unexpected macro weakness, adverse
FX movements.
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