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Tata Consultancy Services (TCS IN)
Marginally below expectations
Q2FY12 result highlights
Quarterly performance: TCS’s reported revenue and EPS growth was marginally below our and Street expectations. USD
revenues grew by 4.7% qoq to US$2.53bn, below our estimate of US$2.55bn. INR revenue growth of 7.7% qoq was driven
by volume growth of 6.2% and a 3.1% INR depreciation, notwithstanding ~60bp impact of cross-currency headwinds and a
pricing realization decline of 1% (-0.95% due to like-on-like pricing and -0.05% due to offshore shift). EBIT margin expanded
by ~90bp qoq (in line with our expectations), with currency impact (+166bp) partially offset by costs related to promotions
and fresher hiring. Lower other income led to net profit growth of 2.5% qoq to Rs24.4bn (IDFC est.: Rs25.4bn).
Key positives: TCS won 10 large deals in Q2 across geographies and verticals and is pursuing over 10 large deals; the
pipeline remains healthy; net hiring was robust at ~13k in Q2; TCS plans ~60k gross hiring in FY12 and has already made
~35k campus offers for FY13. Clients migration was seen across the pyramid – $100m+ to $1m+.
Key negatives: Sequentially, India INR revenues declined by ~4%. Telecom declined by ~4% and ADM grew by just ~1%.
Impact on financials
We raise FY12/13E earnings by 4-5% despite a marginally disappointing Q2 as we build in the weaker INR into our estimates
(Rs48/ 47 for 2H12/ FY13, vs. Rs44/ 43 earlier). We expect ~27% USD revenue growth, largely flat margins, and 24% EPS
growth in FY12. Management commentary was incrementally cautious on the environment, but optimistic about the pipeline
and IT spends. We have introduced FY14 forecasts.
Valuations & view
The stock might move sideways in the near term as the Q2 results lacked positive surprises. Yet we believe that TCS is relatively
well placed to sail through the challenging environment for IT services vendors. TCS and Infosys are key holdings in IDFC
model portfolio despite our underweight stance on the sector. We value TCS at Rs1,230 based on 19x FY13E EPS (from
Rs1,180 earlier) for a 12-month price target. Trading at ~20x FY12E and ~17x FY13E, we maintain Outperformer on the stock.
We note, however, that TCS’s relatively premium multiples in the uncertain macro environment could keep upside potential
capped in near to medium term.
Other highlights
Key deal wins during the quarter
Global
• BαNCS platform selected by a leading global bank to implement asset servicing for wholesale banking and securities
processing for direct custody.
• Selected by a global brewing and bottling company to be its technology partner to provide infrastructure
management services.
USA
• Won a platform standardization deal to consolidate a diverse footprint for a large US-based insurance company.
• Won a large contract for end-to-end remote infrastructure services by a US Fortune 500 medical devices company.
• Selected as a strategic partner for OSS/ BSS transformation by a large cable operator and home internet service
provider in the US.
• A leading generator and marketer of electricity in North America selected TCS as a strategic partner for application
and infrastructure management.
Europe
• Selected by a large broadband and telecommunications player in Europe and Latin America for service management
& integration in a deal valued at over US$100m.
• A leading European financial services provider selected TCS’s BαNCS portfolio for core banking, fraud monitoring,
domestic and international payments.
Rest of the world
• Won the implementation of the BαNCS insurance product across International markets covering five North Asian
countries, including China, for the Life and Annuities business of a leading UK-based life assurance company.
EBIT margin drivers
• EBIT margin expanded by 94bp qoq – positive impact of currency (+166bp), SG&A leverage (+10bp) and offshore
shift (+4bp) was partially offset by rate productivity (-73bp) and others (-13bp).
Hiring, attrition and wage hike
• TCS’s consolidated gross hiring was ~20,300, while net hiring was ~12,600.
• The company plans to hire ~60,000 employees in FY12 (1H gross hiring was over 32,000). For FY13, TCS has
already made ~35k campus offers and plans to make more offers in Q3FY12.
• LTM attrition declined by ~110bp to 13.7%. IT services attrition was 12.5%, while BPO attrition was 24.3%.
Dividend, cash, taxes and hedges
• TCS announced a quarterly cash dividend of Rs3/ share.
• As of end–September 2011, the company had cash and cash equivalents of ~Rs78bn (US$1.6 bn).
• Effective tax rate for the quarter was 24.3%. On the back of the sunset clause of the STPI scheme, we expect tax rates
to remain high. We expect effective tax rates of ~23% for FY12/ FY13.
• TCS’s ex-balance sheet hedge cover includes forward cover of ~US$297m, ~GBP66m and ~AUD21m, and options
of ~US$2,076m, ~GBP174m and ~EUR164m (as effective hedges). The company also has ineffective hedges of
~US$1.6bn (marked to market every quarter).
Maintain Outperformer; price target Rs1,230
We raise FY12/13E earnings by 4-5% despite the marginally disappointing Q2 as we build in the weaker INR into our
estimates (Rs48/ 47 for 2H12/ FY13, vs. Rs44/ 43 earlier). We expect ~27% USD revenue growth, largely flat margins,
and 24% EPS growth in FY12. Management commentary was incrementally cautious on the environment, but optimistic
about the pipeline and IT spends. We have introduced FY14 forecast.
The stock might move sideways in the near term as the Q2 results lacked positive surprises, but we believe TCS is
relatively well placed to sail through the challenging environment for IT services vendors. TCS and Infosys are key
holdings in IDFC model portfolio despite our underweight stance on the sector. We value TCS at Rs1,230 based on 19x
FY13E EPS (from Rs1,180 earlier) for a 12-month price target. With the stock trading at ~20x FY12E and ~17x FY13E,
we maintain Outperformer. We note that the relatively premium multiples amid the uncertain macro environment could
keep upside potential capped in the near to medium term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Consultancy Services (TCS IN)
Marginally below expectations
Q2FY12 result highlights
Quarterly performance: TCS’s reported revenue and EPS growth was marginally below our and Street expectations. USD
revenues grew by 4.7% qoq to US$2.53bn, below our estimate of US$2.55bn. INR revenue growth of 7.7% qoq was driven
by volume growth of 6.2% and a 3.1% INR depreciation, notwithstanding ~60bp impact of cross-currency headwinds and a
pricing realization decline of 1% (-0.95% due to like-on-like pricing and -0.05% due to offshore shift). EBIT margin expanded
by ~90bp qoq (in line with our expectations), with currency impact (+166bp) partially offset by costs related to promotions
and fresher hiring. Lower other income led to net profit growth of 2.5% qoq to Rs24.4bn (IDFC est.: Rs25.4bn).
Key positives: TCS won 10 large deals in Q2 across geographies and verticals and is pursuing over 10 large deals; the
pipeline remains healthy; net hiring was robust at ~13k in Q2; TCS plans ~60k gross hiring in FY12 and has already made
~35k campus offers for FY13. Clients migration was seen across the pyramid – $100m+ to $1m+.
Key negatives: Sequentially, India INR revenues declined by ~4%. Telecom declined by ~4% and ADM grew by just ~1%.
Impact on financials
We raise FY12/13E earnings by 4-5% despite a marginally disappointing Q2 as we build in the weaker INR into our estimates
(Rs48/ 47 for 2H12/ FY13, vs. Rs44/ 43 earlier). We expect ~27% USD revenue growth, largely flat margins, and 24% EPS
growth in FY12. Management commentary was incrementally cautious on the environment, but optimistic about the pipeline
and IT spends. We have introduced FY14 forecasts.
Valuations & view
The stock might move sideways in the near term as the Q2 results lacked positive surprises. Yet we believe that TCS is relatively
well placed to sail through the challenging environment for IT services vendors. TCS and Infosys are key holdings in IDFC
model portfolio despite our underweight stance on the sector. We value TCS at Rs1,230 based on 19x FY13E EPS (from
Rs1,180 earlier) for a 12-month price target. Trading at ~20x FY12E and ~17x FY13E, we maintain Outperformer on the stock.
We note, however, that TCS’s relatively premium multiples in the uncertain macro environment could keep upside potential
capped in near to medium term.
Other highlights
Key deal wins during the quarter
Global
• BαNCS platform selected by a leading global bank to implement asset servicing for wholesale banking and securities
processing for direct custody.
• Selected by a global brewing and bottling company to be its technology partner to provide infrastructure
management services.
USA
• Won a platform standardization deal to consolidate a diverse footprint for a large US-based insurance company.
• Won a large contract for end-to-end remote infrastructure services by a US Fortune 500 medical devices company.
• Selected as a strategic partner for OSS/ BSS transformation by a large cable operator and home internet service
provider in the US.
• A leading generator and marketer of electricity in North America selected TCS as a strategic partner for application
and infrastructure management.
Europe
• Selected by a large broadband and telecommunications player in Europe and Latin America for service management
& integration in a deal valued at over US$100m.
• A leading European financial services provider selected TCS’s BαNCS portfolio for core banking, fraud monitoring,
domestic and international payments.
Rest of the world
• Won the implementation of the BαNCS insurance product across International markets covering five North Asian
countries, including China, for the Life and Annuities business of a leading UK-based life assurance company.
EBIT margin drivers
• EBIT margin expanded by 94bp qoq – positive impact of currency (+166bp), SG&A leverage (+10bp) and offshore
shift (+4bp) was partially offset by rate productivity (-73bp) and others (-13bp).
Hiring, attrition and wage hike
• TCS’s consolidated gross hiring was ~20,300, while net hiring was ~12,600.
• The company plans to hire ~60,000 employees in FY12 (1H gross hiring was over 32,000). For FY13, TCS has
already made ~35k campus offers and plans to make more offers in Q3FY12.
• LTM attrition declined by ~110bp to 13.7%. IT services attrition was 12.5%, while BPO attrition was 24.3%.
Dividend, cash, taxes and hedges
• TCS announced a quarterly cash dividend of Rs3/ share.
• As of end–September 2011, the company had cash and cash equivalents of ~Rs78bn (US$1.6 bn).
• Effective tax rate for the quarter was 24.3%. On the back of the sunset clause of the STPI scheme, we expect tax rates
to remain high. We expect effective tax rates of ~23% for FY12/ FY13.
• TCS’s ex-balance sheet hedge cover includes forward cover of ~US$297m, ~GBP66m and ~AUD21m, and options
of ~US$2,076m, ~GBP174m and ~EUR164m (as effective hedges). The company also has ineffective hedges of
~US$1.6bn (marked to market every quarter).
Maintain Outperformer; price target Rs1,230
We raise FY12/13E earnings by 4-5% despite the marginally disappointing Q2 as we build in the weaker INR into our
estimates (Rs48/ 47 for 2H12/ FY13, vs. Rs44/ 43 earlier). We expect ~27% USD revenue growth, largely flat margins,
and 24% EPS growth in FY12. Management commentary was incrementally cautious on the environment, but optimistic
about the pipeline and IT spends. We have introduced FY14 forecast.
The stock might move sideways in the near term as the Q2 results lacked positive surprises, but we believe TCS is
relatively well placed to sail through the challenging environment for IT services vendors. TCS and Infosys are key
holdings in IDFC model portfolio despite our underweight stance on the sector. We value TCS at Rs1,230 based on 19x
FY13E EPS (from Rs1,180 earlier) for a 12-month price target. With the stock trading at ~20x FY12E and ~17x FY13E,
we maintain Outperformer. We note that the relatively premium multiples amid the uncertain macro environment could
keep upside potential capped in the near to medium term.
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