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UBS Investment Research
First Read: TCS
A nother strong quarter
TCS 1Q profits in line with our estimates, beats street by 5%
TCS reported another strong quarter, with revenue at US$2.4bn (up 7.5% QoQ)/
Rs108bn (up 6.3% QoQ) in line with our estimates. Net profit met our estimates at
Rs23.8bn, down 1% QoQ, but was 5% ahead of consensus. EBIT margins were
down 190bp QoQ to 26.1%, slightly lower than our estimate of 26.1% due to
seasonal wage hikes. Volumes were up 7.4% QoQ vs. our expectations of 6%.
Banking, Financial Services and Insurance grew 5.8% QoQ (vs. 3.3% in 4Q
FY11), while Telecom grew 14.3% QoQ after a sluggish 2H FY11.
TCS sees no impact of macro on IT decision making
Contrary to the cautious commentary from Infosys, TCS management believes that
the ongoing uncertainty in macro economic environment has had no impact so far
on IT budget decisions. However, the management believes that the macro
environment remains challenging, which could delay pricing power for the sector.
Strength in TCS numbers suggests Infosys’ problems are company specific
While we still await other major vendors like Cognizant and Wipro to report
earnings for the quarter, the inherent strength reflected in TCS’ 1Q FY12 earnings
suggest that the weaker numbers reported by Infosys could be company specific
and related to the ongoing restructuring.
Valuation: maintain Neutral
We expect TCS to go back to a 8-10% premium to Infosys on the back of 1Q
earnings surprise to consensus. We are reviewing estimates. Our PT is based on
DCF.
Tata Consultancy Services Ltd.
Tata Consultancy Services (TCS), incorporated in 1968, is the largest Indian IT
services company with revenue of US$6bn in FY09 and more than 143,000
employees. TCS offers services in application development and maintenance,
enterprise solutions, IT infrastructure management, consulting, and business
process outsourcing to its clients. TCS's customers are from the banking,
financial services and insurance, manufacturing, telecom, retail and distribution,
energy and utilities, and life sciences verticals. Its key markets are the US (about
52% of FY09 revenue) and Europe (about 29%).
Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
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