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TCS (TCS IN)
OW: Outperformance continues
TCS reported yet another quarter of strong revenue growth;
positive outlook as new deal pipeline remains healthy
Margins likely to recover as well through the year as
employee pyramid benefits flow through, in our view
We maintain OW rating with a TP of INR1,360
TCS continued its strong performance with revenue growth of 7.4% q-o-q (in USD
terms), yielding revenues of USD2,411m. EBIT margin declined by 210bp q-o-q, led by
wage inflation, currency headwinds, and business mix change. The company maintained
its strong hiring target for FY12 and has not seen any slowdown in demand or
discretionary spending, so far. Pricing remains stable but with a positive bias for 2HFY12,
according to management.
Telecom and emerging markets were the stars of the quarter: Unlike Infosys, TCS
reported strong growth in its Telecom business, growing 13.1% q-o-q. However, this was
largely driven by deals from emerging markets, including Latin America. The company
expects Telecom to grow in the long term, albeit quarterly volatility could continue. The
company won 10 large deals in the quarter and is currently pursuing 15 similar mega-deals.
Pipeline remains robust with discretionary deals, particularly from banking and retail markets.
Margin decline seasonal: EBIT margin decline of 210bps in the quarter is likely to
reverse through rest of the year as employee pyramid broadens. Currently, near 60% of
the total employees have higher than three years of experience, which is likely to shift by
7-8% (in our view), providing near 100bps margin benefit in FY12.
Valuations: We are not changing estimates in this report. The stock is currently trading at
22x and 18x on our Fy12/13e EPS and we continue to value the stock at 22x FY13e EPS
(10% premium to Infosys) at INR1360.
1QFY12 Results Summary
TCS reported another strong quarter with revenues at USD2,411mn, +7.4% q-o-q, better than our
estimate of USD2,383mn. In INR terms revenues were INR 108 b, +6.3% q-o-q, due to currency
appreciation. A robust volume growth of 7.4% sequentially contributed to the growth while overall
pricing declined near 50bps. TCS has started reporting its financial statements in IFRS from this quarter.
The company has not seen any slowdown in demand so far and the pipeline remains healthy. TCS won 10
large deals in the quarter and is currently pursuing 15 similar size mega-deals. The company has not seen
any slowdown in decision making as well.
EBITDA margins declined by 230 bps q-o-q to 28.1%, nearly 50bps lower than our estimate. However
TCS has delivered marginally better EBIT margins (26.2%) compared to that of Infosys (26.1%) in 1Q12.
The wage hikes in this quarter had a negative impact of near 250bps on the margin, which was partly
offset by an increase in utilization excluding trainees to 83.2%, +80bps q-o-q.
Attrition has marginally gone up to 14.8% compared to 14.4% in 4Q12 on LTM basis. Net addition in
this quarter was 3,567 taking the total headcount to 202,190 (+1.8% q-o-q). The management guided for a
gross hiring of 17,000 to 20,000 in the second quarter and overall 60,000 for the full year FY12.
Geographic mix: Sequentially, North America(c 52.9% of total revenues) grew by +5.3%, UK (c15.3%)
grew by +4.9% and Continental Europe (c10%) grew by +6.3%. Revenues from India, APAC and MEA
combined grew at +11% q-o-q, more than twice the rate of the rest of the western geographies (+5.3% q-o-q).
Divisional mix: Growth came from across verticals, led by Hi-tech, Telecom and Retail with double digit
growths of +14.2%, +13.1% and +10.1 respectively on sequential basis. Telecom saw an increase in
discretionary projects mainly from the emerging markets. BFSI contributing to 43.3% of the revenues
grew +4.6% sequentially.
Service mix: Leading the growth, Infrastructure Management Services went up +11% q-o-q and
Application Development and Maintenance up +6.5% q-o-q
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