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Tata Consultancy
Reuters: TCS.BO Bloomberg: TCS IN Exchange: BSE Ticker: TCS
Well positioned to beat
elevated expectations
Pedal to the metal
TCS's 1QFY12 beat indicates that the demand environment for Indian vendors
continues to be strong. The spectacular beat eases pressure on performance for
TCS for the rest of FY12E. With improvement in the outlook for discretionary
spending, it seems well positioned to beat even our above-consensus FY12E USD
revenue growth estimates of 30% yoy. We believe strong revenue growth and
optimal utilisation will help the company maintain its operating margins yoy. We
reiterate our Buy rating and top pick status with a revised target price of INR1,460.
Comprehensive beat in June-Q
TCS reported revenues of USD2.24bn (+7.5% qoq, +0.75% our estimates) driven
by volume growth of 7.4% qoq (+1.4ppts our est.). Constant currency pricing was
down 50bps qoq. Strong volume growth and seasonally higher attrition meant that
utilisation, including trainees, was up 110bps qoq. At 26.2%, operating margins
were down 214bps (101 bps higher than our estimates). Despite lower-thanexpected margin performance (factoring in effect of wage hikes), reported net
income was 2.3% higher than our estimates. Positives are strong growth in
manufacturing, telecom, retail and distribution and enterprise solutions in the
service line. A negative is lower than company average growth in top 10 clients.
FY12E likely to be another high growth year
This beat positions TCS to overhaul its performance of FY11 (USD revenue growth
of 29%yoy) in FY12E. Moreover, with a solid start to FY12E, the company would
need to grow at a 6.7% CQGR (lower than 1QFY12) over the next three quarters in
FY12E to meet our above-consensus expectation of 30% yoy (3 ppts higher than
consensus). Interestingly, after exiting the downturn the company recorded a
CQGR of 6.7% in USD revenues in the following quarters.
Retaining Buy with a revised target price of INR1,460 (30% potential upside)
Our target price is based on a PE of 25x FY12E/06. We believe our target PE is
well supported by a 22% earnings CAGR in FY12-14E. A key risk is higher-thanexpected appreciation of the rupee vs. major billing currencies
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