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In line with expectations: USD revenue disappoints, growth priced in
What surprised us
TCS reported 2QFY12 in line revenues of Rs116.34bn (+7.7% qoq), EBIT of
Rs31.5bn (2% below Bloomberg consensus) and net income of Rs24.4bn
(+1% qoq, 3% below consensus). Positives: (1) A 6.2% volume growth in IT
services remained strong despite 3.8% qoq decline in domestic revenues; (2)
BFSI remained strong at +5.2% qoq in USD, similar to INFY (+4.2% qoq); (3)
TCS added 35 new clients and has 12 clients with US$100mn+ revenues
(first time ever); (4) Attrition eased to 13.7%, the lowest since 1QFY11, as
supply-side pressures start to subside. TCS has given offers to 35k freshers
for next year and maintained its 60k hiring guidance for FY12. Negatives:
(1) EBIT margins expanded by only 95bp qoq (Consensus at +150bp qoq)
due to impact of promotions and lower pricing; (2) Despite 11k employee
adds, utilization (incl. trainees) remained close to the all-time high at 76.4%,
suggesting limited headroom for further expansion; (3) Telecom vertical
declined 4.2% qoq (in USD) after 14.3% qoq growth in 1Q on the back of
discretionary spending in the emerging markets; (4) AD&M, at 45% of 2Q
revenues, slowed to +1.3% qoq (USD), on change in revenue mix.
What to do with the stock
We remain Neutral on TCS as we believe that solid revenue growth is
already priced in. We fine-tune our FY12E-FY14E EPS to factor in long-term
INR/USD at Rs46, and 12-m Director's Cut-based TP to Rs1,130 (from
Rs1,115). We prefer HCL Tech (HCLT.BO, CL-Buy, Rs438.8) and Infosys
(INFY.BO, Buy, Rs2,747.25), on their higher earnings growth. TCS is
trading at 19X FY13E P/E, at an 11% premium to INFY. Risks: higher-thanexpected
tech spending (upside); INR appreciation (downside).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In line with expectations: USD revenue disappoints, growth priced in
What surprised us
TCS reported 2QFY12 in line revenues of Rs116.34bn (+7.7% qoq), EBIT of
Rs31.5bn (2% below Bloomberg consensus) and net income of Rs24.4bn
(+1% qoq, 3% below consensus). Positives: (1) A 6.2% volume growth in IT
services remained strong despite 3.8% qoq decline in domestic revenues; (2)
BFSI remained strong at +5.2% qoq in USD, similar to INFY (+4.2% qoq); (3)
TCS added 35 new clients and has 12 clients with US$100mn+ revenues
(first time ever); (4) Attrition eased to 13.7%, the lowest since 1QFY11, as
supply-side pressures start to subside. TCS has given offers to 35k freshers
for next year and maintained its 60k hiring guidance for FY12. Negatives:
(1) EBIT margins expanded by only 95bp qoq (Consensus at +150bp qoq)
due to impact of promotions and lower pricing; (2) Despite 11k employee
adds, utilization (incl. trainees) remained close to the all-time high at 76.4%,
suggesting limited headroom for further expansion; (3) Telecom vertical
declined 4.2% qoq (in USD) after 14.3% qoq growth in 1Q on the back of
discretionary spending in the emerging markets; (4) AD&M, at 45% of 2Q
revenues, slowed to +1.3% qoq (USD), on change in revenue mix.
What to do with the stock
We remain Neutral on TCS as we believe that solid revenue growth is
already priced in. We fine-tune our FY12E-FY14E EPS to factor in long-term
INR/USD at Rs46, and 12-m Director's Cut-based TP to Rs1,130 (from
Rs1,115). We prefer HCL Tech (HCLT.BO, CL-Buy, Rs438.8) and Infosys
(INFY.BO, Buy, Rs2,747.25), on their higher earnings growth. TCS is
trading at 19X FY13E P/E, at an 11% premium to INFY. Risks: higher-thanexpected
tech spending (upside); INR appreciation (downside).
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