Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A closer look at 2QFY12 reveals that the revenue miss relative to our and Street
expectations (reported revenues of USD 2.53 billion) emanated primarily from
the low-margin India business. Excluding India revenues, international
(exports) revenues grew 5.9% Q/Q (USD). For the international business alone,
volumes grew at a robust 7.3% Q/Q, while constant currency Q/Q growth stood
at 6.4%. The India business tends to be volatile when seen on a quarterly basis.
We believe that the miss in India business in 2QFY12 will be made up in the
remainder of FY12 (2HFY12).
Growth was, once again, all-round from the point of view of verticals with
the lone exception of telecom. In telecom, however, the company has won three
large strategic assignments, which suggests that the segment should grow Q/Q
hereon. Notably, growth in Europe exceeded 6% Q/Q with continental Europe
in particular growing nearly 7% Q/Q (revenues).
TCS’s sustains its superiority on its supply-side (employee) management as
seen from its industry-low attrition numbers this quarter (quarterly annualized
attrition at 15.4% is a good 5.8% below its peer Infosys) despite a much higher
proportion of its workforce in BPO (inherently, a higher turnover segment).
Any worries? Worry at this stage stems mainly from the trend in TCS’s
pricing. Pricing was down 90 bps Q/Q. We note that this is the second straight
quarter of price declines. The company reiterates the overall environment for
pricing is stable on a like-for-like basis. This is consistent with commentary
from Infosys.
TCS versus Infosys? We still prefer TCS for the medium term (>3 months).
Considerable debate now exists on the Street on the TCS vs. Infosys trade,
given that there has been virtually no difference in sequential Q/Q revenue
growth rate between the two bellwethers in 2QFY12 (for the first time in 6
quarters). We repeat that the aberration in TCS’s 2QFY12 growth was due to
volatile India-based revenues, which should prospectively correct. Also, we
believe that Infosys’s quarterly revenue (US$) guidance growth of 3.2-5.4% is
too wide a band, indicating much dispersion to reckon on Infosys hitting the
upper end.
Investment view. Retain relative OW though the TCS stock would be more
attractive on declines given the stock run-up. At current valuations of 17.7
FY13E P/E, we think there is limited upside for investors wanting returns
exceeding cost of equity based on Mar-13 PTs. However, given TCS's revenue
momentum and market share gains in a still healthy environment, we think any
stock correction in TCS is likely to be transient.
2QFY12 Highlights
2QFY12 revenues came in at $2.53 billion, increasing 4.7% Q/Q (in $ terms)
and up 7.7% in INR terms (Rs.116.3 billion). Impressive volume growth of
6.3% drove the revenue growth, while pricing was modestly negative. US$
revenues increased 5.2% Q/Q in constant currency terms. Notably, top-line
growth from international markets (exports) was healthy at 5.9% Q/Q (in USD
terms). India-revenues declined ~6% (in US$ terms). Exchange rate movement
was negative for revenue growth.
Volume growth of 6.25% drove the revenue growth in Q2. We note that
volumes excluding India business increased more than 7.0%, which we believe
is impressive.
Pricing was slightly negative for 2QFY12 and caused 90 bps negative growth for
the quarter. Management attributed the weakness in pricing to change in service
line mix. The company expects pricing to remain stable in the future quarters.
Table 2: Revenue growth break-up by drivers
Revenue growth contribution
Factor 2QFY12
Volume Growth +6.3%
Forex +2.5%
Pricing -0.9%
Offshore Leverage -0.1%
INR Growth +7.7%
Source: Company reports.
All industry verticals (except Telecom) exhibited strong growth. Energy and
Utilities US$ revenues grew 18.5% Q/Q, while Retail grew 9.2% Q/Q.
Manufacturing, Life Sciences & Healthcare and Hi-tech witnessed strong
revenue (US$) growth of 7.4%, 6.7% and 6.5%, respectively, on Q/Q basis.
BFSI revenues increased 5.2% Q/Q (in US$ terms) despite the wide-spread
concerns regarding the financial health of clients in this business unit.
Telecom was the only business unit registering (4.3%) decline sequentially.
Transportation revenues grew 7.5% Q/Q.
TCS added 35 clients during the quarter. Net increase in million dollar clients
was 22, while the company added 3 and 2 accounts to $50 mn and $100 mn
bucket, respectively. TCS won 10 large deals during the quarter including about
5 in the Americas, 4 from Europe, and 1 in other geographies.
Proportion of fixed price contracts decreased significantly (about 290 bps) to
46.8%, from 49.7% last quarter primarily due to expiry of certain fixed price
contracts (we believe in India).
EBIT margins increased 90 bps to 27.1% from 26.2% in 1QFY12 (as per IFRS).
Margins were slightly ahead of our estimate of 26.7%, but slightly below
consensus of 27.5%. INR depreciation was the primary driver of EBIT margin
expansion. Gross profit margins also expanded 90 bps to 45.2%.
Table 3: EBIT margin expansion break-up by levers
Revenue growth contribution
Factor 2QFY12
Currency +166 bps
Offshore leverage +4 bps
Rate realization -73 bps
SG&A optimization +10 bps
Others -23 bps
INR Growth +94 bps
Source: Company reports
TCS reported a net employee addition of 12,580 during the quarter, while gross
addition was 20,349, including 8,125 lateral hires. Management maintained its
guidance to hire 60,000 in FY12.
Quarterly annualized attrition decreases to 15.4% in 2QFY12 decreasing
meaningfully from16.9% in 1QFY12. The quarterly annualized attrition is
significantly lower than Infosys (21.2%) pointing to better supply side
management.
Utilization (excluding trainees) remained flat sequentially at 83.1% (83.2% in
1QFY12), close to the all time high of 83.8% (last year). Utilization including
trainees was up 20 bps from 76.2% to 76.4%. Management reiterated that the
company would target to operate at 82%-84% (ex trainees) utilization rate.
The strong utilization is in agreement with our view that the 'new normal'
for utilization should be higher than the historical average.
All geographies, except India, reported strong revenue growth for TCS in
2QFY12. Encouragingly, Continental Europe and UK witnessed solid
sequential revenue growth of 6.8% and 6.1% Q/Q (in US$ terms),
respectively, despite the macro concerns regarding sovereign debt crisis. APAC
and MEA (Middle-East and Africa) revenues (in US$ terms) grew at 7.6% and
4.6% Q/Q, respectively. Americas’ (the US, Canada and Latin America)
revenues grew 5.4% Q/Q, while India was the only geography reporting
revenues decline (-6.6% Q/Q) in 2QFY12.
In terms of service lines, Global Consulting (+23.7% Q/Q), Asset Leveraged
Solutions (+16.3% Q/Q), Engineering and Industrial Services (+9.2% Q/Q),
and Assurance Services (+9.0% Q/Q) (in US$ terms) reported impressive
revenue growth in 2QFY12. Enterprise Solutions and Infrastructure Services
also witnessed strong revenue growth of 7.6% and 5.8% Q/Q (in US$ terms),
respectively. BPO revenues grew 4.7% Q/Q in 2QFY12, while Application
Development and Management (+1.3% Q/Q) revenue growth was muted.
Business Intelligence revenues were essentially flat (+0.4% Q/Q).
Tax rate for Q2 increased meaningfully to 24.3% (22.7% in 1QFY12). The
increase was primarily due to lower proportion of revenues from SEZs.
DSO stood at 82, decreasing modestly from 84 in 1QFY12. TCS had invested
funds of Rs.94.5 billion at the end of 2QFY12 compared to Rs.105.2 billion last
quarter. The decline was primarily because of payments of dividends and
Diligenta stake acquisition.
Valuation and recommendation
Our Mar-12 price target is Rs 1,210
We maintain our OW rating with Mar-12 PT of Rs1,210, which is based on a oneyear
forward P/E multiple of 19.0x, a modest premium to Infosys’ target multiple of
18x. TCS has exhibited a much better revenue growth profile over the last several
quarters than Infosys; top-line growth has been accompanied by improved
profitability, which we believe justifies the premium.
Risks to our price target
In our view, risks to our PT are weakness in demand environment, significant rupee
appreciation, especially given that TCS has a lower hedging position and higherthan-
expected wage expenses in variable payouts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A closer look at 2QFY12 reveals that the revenue miss relative to our and Street
expectations (reported revenues of USD 2.53 billion) emanated primarily from
the low-margin India business. Excluding India revenues, international
(exports) revenues grew 5.9% Q/Q (USD). For the international business alone,
volumes grew at a robust 7.3% Q/Q, while constant currency Q/Q growth stood
at 6.4%. The India business tends to be volatile when seen on a quarterly basis.
We believe that the miss in India business in 2QFY12 will be made up in the
remainder of FY12 (2HFY12).
Growth was, once again, all-round from the point of view of verticals with
the lone exception of telecom. In telecom, however, the company has won three
large strategic assignments, which suggests that the segment should grow Q/Q
hereon. Notably, growth in Europe exceeded 6% Q/Q with continental Europe
in particular growing nearly 7% Q/Q (revenues).
TCS’s sustains its superiority on its supply-side (employee) management as
seen from its industry-low attrition numbers this quarter (quarterly annualized
attrition at 15.4% is a good 5.8% below its peer Infosys) despite a much higher
proportion of its workforce in BPO (inherently, a higher turnover segment).
Any worries? Worry at this stage stems mainly from the trend in TCS’s
pricing. Pricing was down 90 bps Q/Q. We note that this is the second straight
quarter of price declines. The company reiterates the overall environment for
pricing is stable on a like-for-like basis. This is consistent with commentary
from Infosys.
TCS versus Infosys? We still prefer TCS for the medium term (>3 months).
Considerable debate now exists on the Street on the TCS vs. Infosys trade,
given that there has been virtually no difference in sequential Q/Q revenue
growth rate between the two bellwethers in 2QFY12 (for the first time in 6
quarters). We repeat that the aberration in TCS’s 2QFY12 growth was due to
volatile India-based revenues, which should prospectively correct. Also, we
believe that Infosys’s quarterly revenue (US$) guidance growth of 3.2-5.4% is
too wide a band, indicating much dispersion to reckon on Infosys hitting the
upper end.
Investment view. Retain relative OW though the TCS stock would be more
attractive on declines given the stock run-up. At current valuations of 17.7
FY13E P/E, we think there is limited upside for investors wanting returns
exceeding cost of equity based on Mar-13 PTs. However, given TCS's revenue
momentum and market share gains in a still healthy environment, we think any
stock correction in TCS is likely to be transient.
2QFY12 Highlights
2QFY12 revenues came in at $2.53 billion, increasing 4.7% Q/Q (in $ terms)
and up 7.7% in INR terms (Rs.116.3 billion). Impressive volume growth of
6.3% drove the revenue growth, while pricing was modestly negative. US$
revenues increased 5.2% Q/Q in constant currency terms. Notably, top-line
growth from international markets (exports) was healthy at 5.9% Q/Q (in USD
terms). India-revenues declined ~6% (in US$ terms). Exchange rate movement
was negative for revenue growth.
Volume growth of 6.25% drove the revenue growth in Q2. We note that
volumes excluding India business increased more than 7.0%, which we believe
is impressive.
Pricing was slightly negative for 2QFY12 and caused 90 bps negative growth for
the quarter. Management attributed the weakness in pricing to change in service
line mix. The company expects pricing to remain stable in the future quarters.
Table 2: Revenue growth break-up by drivers
Revenue growth contribution
Factor 2QFY12
Volume Growth +6.3%
Forex +2.5%
Pricing -0.9%
Offshore Leverage -0.1%
INR Growth +7.7%
Source: Company reports.
All industry verticals (except Telecom) exhibited strong growth. Energy and
Utilities US$ revenues grew 18.5% Q/Q, while Retail grew 9.2% Q/Q.
Manufacturing, Life Sciences & Healthcare and Hi-tech witnessed strong
revenue (US$) growth of 7.4%, 6.7% and 6.5%, respectively, on Q/Q basis.
BFSI revenues increased 5.2% Q/Q (in US$ terms) despite the wide-spread
concerns regarding the financial health of clients in this business unit.
Telecom was the only business unit registering (4.3%) decline sequentially.
Transportation revenues grew 7.5% Q/Q.
TCS added 35 clients during the quarter. Net increase in million dollar clients
was 22, while the company added 3 and 2 accounts to $50 mn and $100 mn
bucket, respectively. TCS won 10 large deals during the quarter including about
5 in the Americas, 4 from Europe, and 1 in other geographies.
Proportion of fixed price contracts decreased significantly (about 290 bps) to
46.8%, from 49.7% last quarter primarily due to expiry of certain fixed price
contracts (we believe in India).
EBIT margins increased 90 bps to 27.1% from 26.2% in 1QFY12 (as per IFRS).
Margins were slightly ahead of our estimate of 26.7%, but slightly below
consensus of 27.5%. INR depreciation was the primary driver of EBIT margin
expansion. Gross profit margins also expanded 90 bps to 45.2%.
Table 3: EBIT margin expansion break-up by levers
Revenue growth contribution
Factor 2QFY12
Currency +166 bps
Offshore leverage +4 bps
Rate realization -73 bps
SG&A optimization +10 bps
Others -23 bps
INR Growth +94 bps
Source: Company reports
TCS reported a net employee addition of 12,580 during the quarter, while gross
addition was 20,349, including 8,125 lateral hires. Management maintained its
guidance to hire 60,000 in FY12.
Quarterly annualized attrition decreases to 15.4% in 2QFY12 decreasing
meaningfully from16.9% in 1QFY12. The quarterly annualized attrition is
significantly lower than Infosys (21.2%) pointing to better supply side
management.
Utilization (excluding trainees) remained flat sequentially at 83.1% (83.2% in
1QFY12), close to the all time high of 83.8% (last year). Utilization including
trainees was up 20 bps from 76.2% to 76.4%. Management reiterated that the
company would target to operate at 82%-84% (ex trainees) utilization rate.
The strong utilization is in agreement with our view that the 'new normal'
for utilization should be higher than the historical average.
All geographies, except India, reported strong revenue growth for TCS in
2QFY12. Encouragingly, Continental Europe and UK witnessed solid
sequential revenue growth of 6.8% and 6.1% Q/Q (in US$ terms),
respectively, despite the macro concerns regarding sovereign debt crisis. APAC
and MEA (Middle-East and Africa) revenues (in US$ terms) grew at 7.6% and
4.6% Q/Q, respectively. Americas’ (the US, Canada and Latin America)
revenues grew 5.4% Q/Q, while India was the only geography reporting
revenues decline (-6.6% Q/Q) in 2QFY12.
In terms of service lines, Global Consulting (+23.7% Q/Q), Asset Leveraged
Solutions (+16.3% Q/Q), Engineering and Industrial Services (+9.2% Q/Q),
and Assurance Services (+9.0% Q/Q) (in US$ terms) reported impressive
revenue growth in 2QFY12. Enterprise Solutions and Infrastructure Services
also witnessed strong revenue growth of 7.6% and 5.8% Q/Q (in US$ terms),
respectively. BPO revenues grew 4.7% Q/Q in 2QFY12, while Application
Development and Management (+1.3% Q/Q) revenue growth was muted.
Business Intelligence revenues were essentially flat (+0.4% Q/Q).
Tax rate for Q2 increased meaningfully to 24.3% (22.7% in 1QFY12). The
increase was primarily due to lower proportion of revenues from SEZs.
DSO stood at 82, decreasing modestly from 84 in 1QFY12. TCS had invested
funds of Rs.94.5 billion at the end of 2QFY12 compared to Rs.105.2 billion last
quarter. The decline was primarily because of payments of dividends and
Diligenta stake acquisition.
Valuation and recommendation
Our Mar-12 price target is Rs 1,210
We maintain our OW rating with Mar-12 PT of Rs1,210, which is based on a oneyear
forward P/E multiple of 19.0x, a modest premium to Infosys’ target multiple of
18x. TCS has exhibited a much better revenue growth profile over the last several
quarters than Infosys; top-line growth has been accompanied by improved
profitability, which we believe justifies the premium.
Risks to our price target
In our view, risks to our PT are weakness in demand environment, significant rupee
appreciation, especially given that TCS has a lower hedging position and higherthan-
expected wage expenses in variable payouts.
No comments:
Post a Comment