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TATA CONSULTANCY SERVICES
Earnings miss: Industry issue or company
problems?
Miss in earnings for FY2Q12: TCS’s earnings miss for the quarter ended September
2011 (actual EPS of Rs12.5 vs our estimate of Rs13.3) raises the issue of headwinds
facing the industry in the current weak environment. However, a closer look suggests
that this could be a reflection of weak company performance rather than an industry
issue. Revenue performance was in line at 5.3% q/q constant currency growth (Infosys
was at 5% q/q) while the earnings miss was largely due to a weak EBIT margin
performance (reported 27.1% vs our estimate of 28.4%).
Management’s commentary in the earnings call raises further concerns: While peer
Infosys is guiding for stronger growth in FY2H12, TCS indicated that FY2H12 suffers
from seasonality and, hence, could be weaker than FY1H12. This could signal a change
in the industry leader scoreboard in favour of Infosys, in our opinion. Post the quarterly
results, we reduce our earnings estimates by 3.4% for FY2012 and 4.1% for FY2013.
TCS currently trades at a 5% P/E premium to Infosys vs a discount of 7% for its
entire listed history: TCS’s weak performance for FY2Q12 could lead to a mean
reversal of this P/E premium. This, coupled with a realignment of consensus EPS
expectations, should lead to a stock price correction near term. However, we maintain
our 12-month price target of Rs1,150 and our 2-EW rating on TCS. We continue to
prefer Infosys (1-OW; PT Rs3,050) over TCS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TATA CONSULTANCY SERVICES
Earnings miss: Industry issue or company
problems?
Miss in earnings for FY2Q12: TCS’s earnings miss for the quarter ended September
2011 (actual EPS of Rs12.5 vs our estimate of Rs13.3) raises the issue of headwinds
facing the industry in the current weak environment. However, a closer look suggests
that this could be a reflection of weak company performance rather than an industry
issue. Revenue performance was in line at 5.3% q/q constant currency growth (Infosys
was at 5% q/q) while the earnings miss was largely due to a weak EBIT margin
performance (reported 27.1% vs our estimate of 28.4%).
Management’s commentary in the earnings call raises further concerns: While peer
Infosys is guiding for stronger growth in FY2H12, TCS indicated that FY2H12 suffers
from seasonality and, hence, could be weaker than FY1H12. This could signal a change
in the industry leader scoreboard in favour of Infosys, in our opinion. Post the quarterly
results, we reduce our earnings estimates by 3.4% for FY2012 and 4.1% for FY2013.
TCS currently trades at a 5% P/E premium to Infosys vs a discount of 7% for its
entire listed history: TCS’s weak performance for FY2Q12 could lead to a mean
reversal of this P/E premium. This, coupled with a realignment of consensus EPS
expectations, should lead to a stock price correction near term. However, we maintain
our 12-month price target of Rs1,150 and our 2-EW rating on TCS. We continue to
prefer Infosys (1-OW; PT Rs3,050) over TCS.
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