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We hosted TCS's investor meet/conference call. It remains optimistic on demand and is not
witnessing any changes in demand trends/sales cycle, though it is cautious on current macro
weakness. Lower billable days will likely to have a toll on qoq growth momentum within export
revenues in 3Q12.
TCS remains optimistic on demand
Most investors queries centered around the impact of current macro on demand. TCS is
clearly witnessing no major impact of macro economic weakness on order book, ramp ups,
sales cycle and spending pattern of clients. TCS continues to witness higher order book qoq
due to wallet share gains from vendor churn/consolidation, increasing cost optimisation from
clients driving higher outsourcing and continuing spend on some of the discretionary services.
Secondly it continues to believe that healthy positioning of clients as well as their already
anticipated gradual recovery in global economy post last slowdown in 2008-09 is not driving
any abnormal pattern in IT spending yet.
Even in BFSI, TCS remains optimistic on demand visibility given continuing cost optimisation
deals from clients as well as incremental spending on mobility/cloud, core banking and
risk/compliance related services.
However TCS is cautious on current macro environment. It is closely observing/reviewing
each of its top clients positioning on regular basis to get any signals regarding budget cuts. Its
recent interactions with most of its clients do not indicate any major change in spending
pattern.
TCS is witnessing delay in deal signing from domestic market (contributes 8-9% of revenues)
across various verticals including Government, which has lead to lower than expected growth
from India during 2Q12.
TCS attributed the slowdown in growth rates within top-5 clients in past few quarters towards
their large base. However it remain very focussed in terms of driving absolute growth within
these clients by driving cross selling of new offerings and deeper client mining.
With higher holidays in offshore as well as onsite location in 3Q12 as well as expected
seasonal plant shutdowns in Manufacturing and Hi-Tech verticals, TCS expects lower qoq
growth within USD International revenues (versus reported growth of 5.9% qoq growth in
2Q12). If we assume the 2Q12 end spot rates for various cross currency to continue during
3Q12, cross currency headwind could be 1-1.3% qoq for TCS. However in terms of business
momentum, TCS is not expecting any slowdown yet entering 3QFY12.
Regarding pricing, TCS continues to expect stable pricing with small variation qoq. We
believe that versus TCS's earlier expectation of pricing improvement in 2HFY12, increased
macro headwind starting mid-2Q12 is leading to hard negotiations with clients.
Margin management to remain better
TCS reiterated on maintaining EBIT margins at around 27% assuming INR/USD rate of Rs46.
With current spot rates higher, we expect margins to improve for TCS in coming quarters.
Despite running tight utilisation, TCS still believes further improvement in utilisation excluding
trainees by 1-2% is possible. However with likely gross addition of 27000-28000 in 2HFY12,
utilisation including trainees may remain soft in coming quarters.
TCS believes that any sudden impact on volume growth through macro headwinds may lead
to decline utilisation rates. However it is currently not changing any of its recruitment plans
which are made in anticipation of growth.
Despite most margin levers for TCS are at peak levels, TCS still expects to gain further
leverage from non-employee cost (even excluding depreciation and provision for doubtful
debts besides employee cost).
No change in recruitment plans yet; planning 45,000 campus offers for FY13
Currently TCS is not looking to change its plan of recruiting 60,000 employees on gross basis
during FY12 with 32,337 already done in 1HFY12.
TCS is also planning to give 45,000 campus offers to fresh engineering graduates to join in
FY13 up from 37,000 given last year. Out of the planned 45,000 offers, 35,000 offers are
already given.
Even regarding joining ratios (at around 70%) and salaries offered to fresh engineers, TCS is
not expecting any major change on yoy basis.
Our view
The sharp correction post 2Q12 results to some extent factors lower than our and consensus'
expected revenue growth in 2Q12 as well as increased risk of macro headwinds on TCS's
stellar performance in past quarters.
We continue to believe that with impressive increase in margins over past several quarters,
relative flexibility of TCS to manage any incremental margin pressure emerging from macro
headwinds is lower than some of its peers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We hosted TCS's investor meet/conference call. It remains optimistic on demand and is not
witnessing any changes in demand trends/sales cycle, though it is cautious on current macro
weakness. Lower billable days will likely to have a toll on qoq growth momentum within export
revenues in 3Q12.
TCS remains optimistic on demand
Most investors queries centered around the impact of current macro on demand. TCS is
clearly witnessing no major impact of macro economic weakness on order book, ramp ups,
sales cycle and spending pattern of clients. TCS continues to witness higher order book qoq
due to wallet share gains from vendor churn/consolidation, increasing cost optimisation from
clients driving higher outsourcing and continuing spend on some of the discretionary services.
Secondly it continues to believe that healthy positioning of clients as well as their already
anticipated gradual recovery in global economy post last slowdown in 2008-09 is not driving
any abnormal pattern in IT spending yet.
Even in BFSI, TCS remains optimistic on demand visibility given continuing cost optimisation
deals from clients as well as incremental spending on mobility/cloud, core banking and
risk/compliance related services.
However TCS is cautious on current macro environment. It is closely observing/reviewing
each of its top clients positioning on regular basis to get any signals regarding budget cuts. Its
recent interactions with most of its clients do not indicate any major change in spending
pattern.
TCS is witnessing delay in deal signing from domestic market (contributes 8-9% of revenues)
across various verticals including Government, which has lead to lower than expected growth
from India during 2Q12.
TCS attributed the slowdown in growth rates within top-5 clients in past few quarters towards
their large base. However it remain very focussed in terms of driving absolute growth within
these clients by driving cross selling of new offerings and deeper client mining.
With higher holidays in offshore as well as onsite location in 3Q12 as well as expected
seasonal plant shutdowns in Manufacturing and Hi-Tech verticals, TCS expects lower qoq
growth within USD International revenues (versus reported growth of 5.9% qoq growth in
2Q12). If we assume the 2Q12 end spot rates for various cross currency to continue during
3Q12, cross currency headwind could be 1-1.3% qoq for TCS. However in terms of business
momentum, TCS is not expecting any slowdown yet entering 3QFY12.
Regarding pricing, TCS continues to expect stable pricing with small variation qoq. We
believe that versus TCS's earlier expectation of pricing improvement in 2HFY12, increased
macro headwind starting mid-2Q12 is leading to hard negotiations with clients.
Margin management to remain better
TCS reiterated on maintaining EBIT margins at around 27% assuming INR/USD rate of Rs46.
With current spot rates higher, we expect margins to improve for TCS in coming quarters.
Despite running tight utilisation, TCS still believes further improvement in utilisation excluding
trainees by 1-2% is possible. However with likely gross addition of 27000-28000 in 2HFY12,
utilisation including trainees may remain soft in coming quarters.
TCS believes that any sudden impact on volume growth through macro headwinds may lead
to decline utilisation rates. However it is currently not changing any of its recruitment plans
which are made in anticipation of growth.
Despite most margin levers for TCS are at peak levels, TCS still expects to gain further
leverage from non-employee cost (even excluding depreciation and provision for doubtful
debts besides employee cost).
No change in recruitment plans yet; planning 45,000 campus offers for FY13
Currently TCS is not looking to change its plan of recruiting 60,000 employees on gross basis
during FY12 with 32,337 already done in 1HFY12.
TCS is also planning to give 45,000 campus offers to fresh engineering graduates to join in
FY13 up from 37,000 given last year. Out of the planned 45,000 offers, 35,000 offers are
already given.
Even regarding joining ratios (at around 70%) and salaries offered to fresh engineers, TCS is
not expecting any major change on yoy basis.
Our view
The sharp correction post 2Q12 results to some extent factors lower than our and consensus'
expected revenue growth in 2Q12 as well as increased risk of macro headwinds on TCS's
stellar performance in past quarters.
We continue to believe that with impressive increase in margins over past several quarters,
relative flexibility of TCS to manage any incremental margin pressure emerging from macro
headwinds is lower than some of its peers.
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