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Risk-reward less favorable
We maintain our Neutral rating
Sustaining growth on expanded revenue base to be a challenge
considering the macro environment and higher BFSI exposure
Limited headroom to improve margins, with most levers being exhausted
through aggressive cost management efforts.
Stock outperformance over the past 3, 6 and 12 months leaves limited
room to stomach negative surprises; Neutral.
Higher skew towards BFSI puts sustenance of outperformance at risk
TCS derives 44% of its revenues from BFSI v/s 35%, 27% and 26% for Infosys,
Wipro and HCL Tech, respectively. Moreover, at a higher revenue base, portfolio
diversification to other sectors becomes even more important. The ongoing crisis in
Europe (TCS derives 25% of its BFSI revenue from Europe) and US increases TCS'
overall risk profile v/s peers, implying that the company's revenue outperformance v/s
peers will be difficult to replicate in FY13.
Limited headroom to improve margins
TCS' continued aggression in cost management and exercise of margin levers saw the
company expand its EBIT margins by ~560bp over 1QFY08-4QFY11. During this
period: (1) SGA costs reduced by 370bp, (2) proportion of revenues from offshore
increased by ~900bp, and (3) proportion of revenues from fixed price contracts increased
by 700bp. However, with TCS' utilization close to historical peaks, the company is
more likely to keep some slack in utilization to be able to better manage growth when
it returns.
Ability to drive non-linearity more important on a higher revenue base
TCS needs to crank up its non-linear initiatives faster than peers on a higher revenue and
headcount base. Growth for TCS on this base will be increasingly a function of how much
the company can hire. While TCS has non-linear plays like Bancs, SMB (iON), platforms
& solutions and certain government projects, we believe it will need to do more. TCS'
revenues from non-linear initiates are unlikely to be very different from peers that report
them at 8-11% of revenues.
Higher Emerging Markets exposure not a cushion during the downturn
As revenues from BT bottom out for Infosys and the company's restructured house is in
order, revenue growth rates of TCS and Infosys should converge. While TCS' high exposure
to BFSI puts it at risk in the current environment, we do not believe that the cushion
against this may come in the form of higher exposure to emerging economies. The table
below shows the incremental revenue growth contribution by emerging economies in FY09.
As the numbers suggest, the contribution to growth from emerging economies during a
downturn is not significant. However a large acquisition in a competency gap like healthcare
can be a significant positive for TCS.
Cutting revenue and EPS estimates by 4% and 8%, respectively for FY13
Our revenue growth and operating margin estimates for TCS are largely unchanged for
FY12. We expect TCS to grow its revenue by 27% and our EPS estimate for FY12
stands at INR52.8. However, we expect FY13 USD revenue growth to moderate to
15.4% (v/s 14.7% at Infosys). Also, we see slack in utilization driving margins down by
90bp in FY13, leading to a 8% cut in our EPS estimate for FY13 to INR58.6.
Current valuations leave limited room for negative surprises
TCS currently trades at 18x FY13E EPS of INR58.6. The stock has yielded a return of
-10% on a YTD basis v/s -29%, -32% and -14% for Infosys, Wipro and HCL Tech,
respectively. Though current valuations indicate a premium over Infosys on the back of
strong revenue and operational performance in the past, we believe TCS has limited room
to drive a similar outperformance over the next year, both in terms of margins and revenues.
Moreover, the expanded base (revenue run-rate in 1QFY12 implies a revenue base of
USD9.6b for FY12) raises the hurdle on incremental growth rates. We value TCS at 20x
FY13E EPS of INR58.6, yielding a price target of INR1,172 - 12% upside. We have a
Neutral rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Risk-reward less favorable
We maintain our Neutral rating
Sustaining growth on expanded revenue base to be a challenge
considering the macro environment and higher BFSI exposure
Limited headroom to improve margins, with most levers being exhausted
through aggressive cost management efforts.
Stock outperformance over the past 3, 6 and 12 months leaves limited
room to stomach negative surprises; Neutral.
Higher skew towards BFSI puts sustenance of outperformance at risk
TCS derives 44% of its revenues from BFSI v/s 35%, 27% and 26% for Infosys,
Wipro and HCL Tech, respectively. Moreover, at a higher revenue base, portfolio
diversification to other sectors becomes even more important. The ongoing crisis in
Europe (TCS derives 25% of its BFSI revenue from Europe) and US increases TCS'
overall risk profile v/s peers, implying that the company's revenue outperformance v/s
peers will be difficult to replicate in FY13.
Limited headroom to improve margins
TCS' continued aggression in cost management and exercise of margin levers saw the
company expand its EBIT margins by ~560bp over 1QFY08-4QFY11. During this
period: (1) SGA costs reduced by 370bp, (2) proportion of revenues from offshore
increased by ~900bp, and (3) proportion of revenues from fixed price contracts increased
by 700bp. However, with TCS' utilization close to historical peaks, the company is
more likely to keep some slack in utilization to be able to better manage growth when
it returns.
Ability to drive non-linearity more important on a higher revenue base
TCS needs to crank up its non-linear initiatives faster than peers on a higher revenue and
headcount base. Growth for TCS on this base will be increasingly a function of how much
the company can hire. While TCS has non-linear plays like Bancs, SMB (iON), platforms
& solutions and certain government projects, we believe it will need to do more. TCS'
revenues from non-linear initiates are unlikely to be very different from peers that report
them at 8-11% of revenues.
Higher Emerging Markets exposure not a cushion during the downturn
As revenues from BT bottom out for Infosys and the company's restructured house is in
order, revenue growth rates of TCS and Infosys should converge. While TCS' high exposure
to BFSI puts it at risk in the current environment, we do not believe that the cushion
against this may come in the form of higher exposure to emerging economies. The table
below shows the incremental revenue growth contribution by emerging economies in FY09.
As the numbers suggest, the contribution to growth from emerging economies during a
downturn is not significant. However a large acquisition in a competency gap like healthcare
can be a significant positive for TCS.
Cutting revenue and EPS estimates by 4% and 8%, respectively for FY13
Our revenue growth and operating margin estimates for TCS are largely unchanged for
FY12. We expect TCS to grow its revenue by 27% and our EPS estimate for FY12
stands at INR52.8. However, we expect FY13 USD revenue growth to moderate to
15.4% (v/s 14.7% at Infosys). Also, we see slack in utilization driving margins down by
90bp in FY13, leading to a 8% cut in our EPS estimate for FY13 to INR58.6.
Current valuations leave limited room for negative surprises
TCS currently trades at 18x FY13E EPS of INR58.6. The stock has yielded a return of
-10% on a YTD basis v/s -29%, -32% and -14% for Infosys, Wipro and HCL Tech,
respectively. Though current valuations indicate a premium over Infosys on the back of
strong revenue and operational performance in the past, we believe TCS has limited room
to drive a similar outperformance over the next year, both in terms of margins and revenues.
Moreover, the expanded base (revenue run-rate in 1QFY12 implies a revenue base of
USD9.6b for FY12) raises the hurdle on incremental growth rates. We value TCS at 20x
FY13E EPS of INR58.6, yielding a price target of INR1,172 - 12% upside. We have a
Neutral rating.
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