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India Equity Research Reports, IPO and Stock News
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Better placed than most
�� Downgrade to REDUCE, significant risk to Street FY13-14 EPS
�� See demand deteriorating by late FY12, cut FY13E EPS by 12%
�� Better placed than peers, but not likely unscathed
�� Heightened risk aversion could lead to a de-rating
Downgrade to REDUCE
We downgrade TCS to REDUCE (from
Buy) and the India IT services sector
outlook to DETERIORATING. We think the
stock reflects neither a likely prolonged
anaemic macro growth scenario nor the
50% chance of a US recession that our
economics team forecasts. Also, we are
yet to see material Street downgrades
since the macro data started worsening.
We believe even two-three quarters of
flat-to-muted q-q revenue growth in FY12-
13 (vs Bloomberg consensus forecast of
4-5% q-q growth on average) could lead
to large EPS cuts.
Hard to see a likely macro downturn not impacting TCS
Over the past three years, TCS has undergone significant changes and
now probably has the most settled organisational structure among peers.
This has led to better decision making and accountability, which in turn
has seen it consistently beat Street expectations and improve margins.
We also believe TCS’s contingency plan to deal with another downturn
and its scale could make it better placed than peers. However, this does
not take away from the fact that in the event of an overall slowdown, TCS
will not stay unaffected. In fact, our exercise suggests that another
recession of a similar magnitude as 2008-09 could result in worse q-q
revenue dips for Indian IT players than seen in FY09.
Lowering estimates significantly
We revise our estimates to factor in the probability of a recession that our
economists now expect. Our FY13-14 revenue estimates are down 11-
13%, given we expect demand to worsen around late 2011. Moreover,
we believe some of the revenue cuts will be led by a loss of pricing, given
we expect demand weakness ahead. Therefore, on a constant-currency
basis, we see EBIT margin heading lower into FY13. Our FY13-14 EPS
estimates our down 12-13% and are now 10-12% below consensus.
Valuation and target price
Given heightened macro uncertainty and risk aversion, we expect stocks
to trade significantly below the level implied by our DCF model based on
long-term average risk assumptions. In 2008, large-cap Indian stocks fell
as much as 40-65% below our fair value estimates, so we set our TP for
TCS at a 20% discount to our DCF value. Our new TP implies an FY13E
P/E of 14.8x. Key risks to our TP are: 1) unexpected USD/INR
depreciation (as seen in 2008-09) that negates our EPS cuts, and
2) less-than-expected deterioration of the macro environment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Better placed than most
�� Downgrade to REDUCE, significant risk to Street FY13-14 EPS
�� See demand deteriorating by late FY12, cut FY13E EPS by 12%
�� Better placed than peers, but not likely unscathed
�� Heightened risk aversion could lead to a de-rating
Downgrade to REDUCE
We downgrade TCS to REDUCE (from
Buy) and the India IT services sector
outlook to DETERIORATING. We think the
stock reflects neither a likely prolonged
anaemic macro growth scenario nor the
50% chance of a US recession that our
economics team forecasts. Also, we are
yet to see material Street downgrades
since the macro data started worsening.
We believe even two-three quarters of
flat-to-muted q-q revenue growth in FY12-
13 (vs Bloomberg consensus forecast of
4-5% q-q growth on average) could lead
to large EPS cuts.
Hard to see a likely macro downturn not impacting TCS
Over the past three years, TCS has undergone significant changes and
now probably has the most settled organisational structure among peers.
This has led to better decision making and accountability, which in turn
has seen it consistently beat Street expectations and improve margins.
We also believe TCS’s contingency plan to deal with another downturn
and its scale could make it better placed than peers. However, this does
not take away from the fact that in the event of an overall slowdown, TCS
will not stay unaffected. In fact, our exercise suggests that another
recession of a similar magnitude as 2008-09 could result in worse q-q
revenue dips for Indian IT players than seen in FY09.
Lowering estimates significantly
We revise our estimates to factor in the probability of a recession that our
economists now expect. Our FY13-14 revenue estimates are down 11-
13%, given we expect demand to worsen around late 2011. Moreover,
we believe some of the revenue cuts will be led by a loss of pricing, given
we expect demand weakness ahead. Therefore, on a constant-currency
basis, we see EBIT margin heading lower into FY13. Our FY13-14 EPS
estimates our down 12-13% and are now 10-12% below consensus.
Valuation and target price
Given heightened macro uncertainty and risk aversion, we expect stocks
to trade significantly below the level implied by our DCF model based on
long-term average risk assumptions. In 2008, large-cap Indian stocks fell
as much as 40-65% below our fair value estimates, so we set our TP for
TCS at a 20% discount to our DCF value. Our new TP implies an FY13E
P/E of 14.8x. Key risks to our TP are: 1) unexpected USD/INR
depreciation (as seen in 2008-09) that negates our EPS cuts, and
2) less-than-expected deterioration of the macro environment.
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