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UBS Investment Research
Tata Consultancy Services Ltd.
B ase effect finally catches up
Event: Q2 FY12 revenue, earnings disappoint
Tata Consultancy Services’ (TCS) revenue grew 7.7% to Rs116.3bn in Q2 FY12,
2.9% below our estimate and 0.7% below consensus. Dollar revenue, at US$2.5bn,
was also lower than our estimate of US$2.6bn. EBITDA margin at 29.1%, was up
100bp, but below our estimate of 29.4%. Net profit rose 2.5% QoQ to Rs24.7bn,
5% below UBS and 3% below consensus estimates.
Impact: gap to Infosys narrows, stock premium likely to erode
Dollar revenue growth at 4.7% QoQ was more or less in line with the 4.5% QoQ
recorded by Infosys. While volume growth (6.25% QoQ) was higher than the 4.4%
for Infosys, Infosys’s guidance assumes steady revenue momentum for H2 FY12
while TCS expects a slower H2. We expect revenue growth to converge for the
two companies in H2 FY12, which could erode TCS’ valuation premium to Infosys
(6.5% at present).
Action: cutting dollar revenue forecasts 2-3%
We cut our FY12/FY13 dollar revenue forecasts 2.5%/3.0% to reflect the slower
volume momentum and lower pricing (down 95bp QoQ) in Q2 FY12. We assume
US$/Rs rates of 49/47 for H2 FY12/FY13, which leads to a Rs earnings upgrade of
0.5%/2.0% in FY12/FY13.
Valuation: downgrade to Sell, maintain price target at Rs1,000
While TCS remains bullish on demand we remain concerned about the spending
outlook for 2012, especially in financial services, where TCS has 44% revenue
exposure. At current levels, we believe the stock does not adequately reflect these
concerns. We downgrade our rating from Neutral to Sell, and maintain our price
target. We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool.
Tata Consultancy Services Ltd.
Tata Consultancy Services (TCS), incorporated in 1968, is the largest Indian IT
services company with revenue of US$6bn in FY09 and more than 143,000
employees. TCS offers services in application development and maintenance,
enterprise solutions, IT infrastructure management, consulting, and business
process outsourcing to its clients. TCS's customers are from the banking,
financial services and insurance, manufacturing, telecom, retail and distribution,
energy and utilities, and life sciences verticals. Its key markets are the US (about
52% of FY09 revenue) and Europe (about 29%).
Statement of Risk
We believe a sharp decline in IT services spending could result in downward
revision to our earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tata Consultancy Services Ltd.
B ase effect finally catches up
Event: Q2 FY12 revenue, earnings disappoint
Tata Consultancy Services’ (TCS) revenue grew 7.7% to Rs116.3bn in Q2 FY12,
2.9% below our estimate and 0.7% below consensus. Dollar revenue, at US$2.5bn,
was also lower than our estimate of US$2.6bn. EBITDA margin at 29.1%, was up
100bp, but below our estimate of 29.4%. Net profit rose 2.5% QoQ to Rs24.7bn,
5% below UBS and 3% below consensus estimates.
Impact: gap to Infosys narrows, stock premium likely to erode
Dollar revenue growth at 4.7% QoQ was more or less in line with the 4.5% QoQ
recorded by Infosys. While volume growth (6.25% QoQ) was higher than the 4.4%
for Infosys, Infosys’s guidance assumes steady revenue momentum for H2 FY12
while TCS expects a slower H2. We expect revenue growth to converge for the
two companies in H2 FY12, which could erode TCS’ valuation premium to Infosys
(6.5% at present).
Action: cutting dollar revenue forecasts 2-3%
We cut our FY12/FY13 dollar revenue forecasts 2.5%/3.0% to reflect the slower
volume momentum and lower pricing (down 95bp QoQ) in Q2 FY12. We assume
US$/Rs rates of 49/47 for H2 FY12/FY13, which leads to a Rs earnings upgrade of
0.5%/2.0% in FY12/FY13.
Valuation: downgrade to Sell, maintain price target at Rs1,000
While TCS remains bullish on demand we remain concerned about the spending
outlook for 2012, especially in financial services, where TCS has 44% revenue
exposure. At current levels, we believe the stock does not adequately reflect these
concerns. We downgrade our rating from Neutral to Sell, and maintain our price
target. We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool.
Tata Consultancy Services Ltd.
Tata Consultancy Services (TCS), incorporated in 1968, is the largest Indian IT
services company with revenue of US$6bn in FY09 and more than 143,000
employees. TCS offers services in application development and maintenance,
enterprise solutions, IT infrastructure management, consulting, and business
process outsourcing to its clients. TCS's customers are from the banking,
financial services and insurance, manufacturing, telecom, retail and distribution,
energy and utilities, and life sciences verticals. Its key markets are the US (about
52% of FY09 revenue) and Europe (about 29%).
Statement of Risk
We believe a sharp decline in IT services spending could result in downward
revision to our earnings estimates.
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