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Tata Consultancy Services (TCS IN; Last Price: INR1020; DB Rec:
Buy)
Stock down 10.3% over past one month: The stock currently trades at 17x 1 year
forward earnings – which is at slight discount to long term average. Even though the
stock currently trades at a 40% premium to the Sensex, we believe that the premium is
justified given: (i) Long term earnings growth visibility of 20-30% for the company. (ii)
FCF yield of 5%, (iii) ROE of 40%+
The stock is factoring in a 22% CAGR in USD revenues over FY11-13E vs our baseline
estimate of 30%. Stock is pricing in 16% earnings growth expectations for FY11-13 vs.
our current expectation of 22%.
Why is stock weakness unjustified: (i) Revenue/ volume growth concerns as implied in
the current stock valuation are excessive? (ii) Our checks with management indicate that
despite heightened worries over the macroeconomic outlook in western markets, we
have seen neither any change in clients’ IT services spending, nor any early signs to
believe so. (iii) TCS’ largest exposure is to the financial services sector (43% of revenues)
and in the event of another recession induced credit crisis, will be the first sector to
curtail spending. Our checks with three of TCS’ top 5 financial services customers
indicates that they are: (a) Continuing with their long term IT services spending plans
with the offshore vendors which have been used as an important tool to reduce or make
cost variable and also to drive efficiency. (b) With offshore now being viewed as a
strategic advantage, TCS is making market share gains vs its MNC counterparts like
Accenture and IBM.
Triggers for near term outperformance: The internal planning for the 2012 IT budgets of
most financial services companies will be underway in Sept-Oct 2011. This will set the
tone for the near term and 2012 performance. Sept-Q results to be announced mid- Oct
Key Risks: We identify three industry-level risks: a) a more severe-than-anticipated global
slowdown, b) global vendor competition, c) aggressive steps taken by global vendors to
adopt the offshore model and increasing wage inflation with supply side issues. For TCS,
the key company-specific downside risks remains that of relatively higher exposure to
the BFSI vertical and consequent compression of its earnings multiple due to greater
impact of the financial market turmoil.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Consultancy Services (TCS IN; Last Price: INR1020; DB Rec:
Buy)
Stock down 10.3% over past one month: The stock currently trades at 17x 1 year
forward earnings – which is at slight discount to long term average. Even though the
stock currently trades at a 40% premium to the Sensex, we believe that the premium is
justified given: (i) Long term earnings growth visibility of 20-30% for the company. (ii)
FCF yield of 5%, (iii) ROE of 40%+
The stock is factoring in a 22% CAGR in USD revenues over FY11-13E vs our baseline
estimate of 30%. Stock is pricing in 16% earnings growth expectations for FY11-13 vs.
our current expectation of 22%.
Why is stock weakness unjustified: (i) Revenue/ volume growth concerns as implied in
the current stock valuation are excessive? (ii) Our checks with management indicate that
despite heightened worries over the macroeconomic outlook in western markets, we
have seen neither any change in clients’ IT services spending, nor any early signs to
believe so. (iii) TCS’ largest exposure is to the financial services sector (43% of revenues)
and in the event of another recession induced credit crisis, will be the first sector to
curtail spending. Our checks with three of TCS’ top 5 financial services customers
indicates that they are: (a) Continuing with their long term IT services spending plans
with the offshore vendors which have been used as an important tool to reduce or make
cost variable and also to drive efficiency. (b) With offshore now being viewed as a
strategic advantage, TCS is making market share gains vs its MNC counterparts like
Accenture and IBM.
Triggers for near term outperformance: The internal planning for the 2012 IT budgets of
most financial services companies will be underway in Sept-Oct 2011. This will set the
tone for the near term and 2012 performance. Sept-Q results to be announced mid- Oct
Key Risks: We identify three industry-level risks: a) a more severe-than-anticipated global
slowdown, b) global vendor competition, c) aggressive steps taken by global vendors to
adopt the offshore model and increasing wage inflation with supply side issues. For TCS,
the key company-specific downside risks remains that of relatively higher exposure to
the BFSI vertical and consequent compression of its earnings multiple due to greater
impact of the financial market turmoil.
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