Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS (TCS)
Technology
High expectations mar a decent quarter, downgrade to REDUCE on valuations.
TCS reported a sub-par quarter with revenue growth of 4.7% qoq to US$2.53 bn,
1.3% lower than our estimate. Volume growth was strong though pricing decline
impacted revenue growth. Quarterly volatility in performance is understandable but
does play a role in setting and resetting of expectations. We expect a reset down in
case of TCS. We are comfortable with our growth forecasts but uncomfortable on
valuations, rich at 19X FY2013E earnings. REDUCE from ADD; TP cut marginally (0.5%
to Rs1,150).
A slip after several quarters of outperformance
TCS’ 2QFY12 revenues of US$2.53 bn (+4.7% qoq) were 1.3% lower than our estimate. Revenue
growth was impacted by (1) 6.6% decline in India revenues and (2) muted performance from
GDCs—revenue from LatAm market was also flat qoq. Some sheen from strong volume growth of
6.1% qoq was taken off by a surprising decline of 0.9% in pricing. Operating margin increased 90
bps to 27.1%, aided by 166 bps benefit from Rupee depreciation and offset by 73 bps pressure
from pricing decline. Net income of Rs24.4 bn was in line with our estimate.
Pricing decline a surprise, volume growth encouraging
We are encouraged by (1) strong volume growth, (2) broad-based vertical-wise revenue growth
except telecom, (3) good hiring numbers and 35K offers for new campus joinees next year.
However, we are surprised by second consecutive quarter of pricing decline. Management
explanation of adverse business mix shift does not explain the decline since growth was led by
high pricing areas of developed markets and discretionary spend areas. The only plausible reason
for the pricing dip could be decline in revenues from high-yield fixed-price projects.
Business strength to remain solid and strong
While India business-induced miss in growth is a concern, there are several positive indicators on
demand including (1) broad-based revenue growth, (2) large deal wins across verticals and service
offerings—TCS announced 10 such wins, (3) high campus offers of 35K. Pace of decision making
remains unchanged, per TCS. We broadly retain our revenue growth estimates for FY2012/13E.
Valuations not supportive; cut rating to REDUCE
Even as we are positive on growth prospects, expectations do play an important role in stock
returns. TCS suffers from high expectations, driven partly by the company’s strong performance
over the last two years. Valuations at 18.5X FY2013E earnings have little upside. We cut TCS
rating to REDUCE from ADD. Maintain EPS estimates of Rs53/61 for FY2012/13E. Our target price
of Rs1,150/share is based on 19X FY2013E earnings (mid-cycle multiple).
Upside from these levels (both earnings as well as multiple led) hinges on
sustenance of growth momentum, which is of course possible but not in our
numbers
We recently moderated our FY2013E base-case revenue growth assumption for Tier-I names
to 13-17% from the earlier 16-20% to factor in a potential slowdown on account of macro
challenges. Our base case assumes flat to marginally down IT budgets across clients in
developed markets and a dip in discretionary spending in CY2012E. In a macro environment
as fluid as we are currently in, we find our assumptions apt—building in a fair degree of
caution without being overly bearish. There is of course a good upside potential; however,
we would remain on the sidelines for the time being and wait for more clarity on CY2012E
budgets unless valuations start building in more conservatism than required (a no marketshare
gain scenario, essentially). TCS’ current valuations do not pass this filter and hence the
downgrade.
Other highlights
Gross headcount addition for the quarter was 20,349. Net headcount addition was
12,580. Close to 45% of gross recruitment in India for the quarter were laterals. The
company absorbed around 10,200 freshers.
TCS retained its 60,000 gross hiring target for FY2012E and has made 35,000 campus
offers for next year.
Attrition on an LTM basis declined to 12.5%.
End-September 2011 hedging reserve was Rs4.7 bn; this would flow through the P&L
over the next few quarters, if Re/US$ were to remain at end-September 2011 levels. We
note that we do not build in any forex loss in FY2013E, consistent with our Re/US$
assumption of 45.6.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS (TCS)
Technology
High expectations mar a decent quarter, downgrade to REDUCE on valuations.
TCS reported a sub-par quarter with revenue growth of 4.7% qoq to US$2.53 bn,
1.3% lower than our estimate. Volume growth was strong though pricing decline
impacted revenue growth. Quarterly volatility in performance is understandable but
does play a role in setting and resetting of expectations. We expect a reset down in
case of TCS. We are comfortable with our growth forecasts but uncomfortable on
valuations, rich at 19X FY2013E earnings. REDUCE from ADD; TP cut marginally (0.5%
to Rs1,150).
A slip after several quarters of outperformance
TCS’ 2QFY12 revenues of US$2.53 bn (+4.7% qoq) were 1.3% lower than our estimate. Revenue
growth was impacted by (1) 6.6% decline in India revenues and (2) muted performance from
GDCs—revenue from LatAm market was also flat qoq. Some sheen from strong volume growth of
6.1% qoq was taken off by a surprising decline of 0.9% in pricing. Operating margin increased 90
bps to 27.1%, aided by 166 bps benefit from Rupee depreciation and offset by 73 bps pressure
from pricing decline. Net income of Rs24.4 bn was in line with our estimate.
Pricing decline a surprise, volume growth encouraging
We are encouraged by (1) strong volume growth, (2) broad-based vertical-wise revenue growth
except telecom, (3) good hiring numbers and 35K offers for new campus joinees next year.
However, we are surprised by second consecutive quarter of pricing decline. Management
explanation of adverse business mix shift does not explain the decline since growth was led by
high pricing areas of developed markets and discretionary spend areas. The only plausible reason
for the pricing dip could be decline in revenues from high-yield fixed-price projects.
Business strength to remain solid and strong
While India business-induced miss in growth is a concern, there are several positive indicators on
demand including (1) broad-based revenue growth, (2) large deal wins across verticals and service
offerings—TCS announced 10 such wins, (3) high campus offers of 35K. Pace of decision making
remains unchanged, per TCS. We broadly retain our revenue growth estimates for FY2012/13E.
Valuations not supportive; cut rating to REDUCE
Even as we are positive on growth prospects, expectations do play an important role in stock
returns. TCS suffers from high expectations, driven partly by the company’s strong performance
over the last two years. Valuations at 18.5X FY2013E earnings have little upside. We cut TCS
rating to REDUCE from ADD. Maintain EPS estimates of Rs53/61 for FY2012/13E. Our target price
of Rs1,150/share is based on 19X FY2013E earnings (mid-cycle multiple).
Upside from these levels (both earnings as well as multiple led) hinges on
sustenance of growth momentum, which is of course possible but not in our
numbers
We recently moderated our FY2013E base-case revenue growth assumption for Tier-I names
to 13-17% from the earlier 16-20% to factor in a potential slowdown on account of macro
challenges. Our base case assumes flat to marginally down IT budgets across clients in
developed markets and a dip in discretionary spending in CY2012E. In a macro environment
as fluid as we are currently in, we find our assumptions apt—building in a fair degree of
caution without being overly bearish. There is of course a good upside potential; however,
we would remain on the sidelines for the time being and wait for more clarity on CY2012E
budgets unless valuations start building in more conservatism than required (a no marketshare
gain scenario, essentially). TCS’ current valuations do not pass this filter and hence the
downgrade.
Other highlights
Gross headcount addition for the quarter was 20,349. Net headcount addition was
12,580. Close to 45% of gross recruitment in India for the quarter were laterals. The
company absorbed around 10,200 freshers.
TCS retained its 60,000 gross hiring target for FY2012E and has made 35,000 campus
offers for next year.
Attrition on an LTM basis declined to 12.5%.
End-September 2011 hedging reserve was Rs4.7 bn; this would flow through the P&L
over the next few quarters, if Re/US$ were to remain at end-September 2011 levels. We
note that we do not build in any forex loss in FY2013E, consistent with our Re/US$
assumption of 45.6.
No comments:
Post a Comment