Tata Consultancy Services 2Q: Steady volume growth :Macquarie Research,

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Tata Consultancy Services
2Q: Steady volume growth
Event
 TCS reported mixed results with strong deal signings and positive deal
commentary. The company matched 2Q street estimates on revenues and
margins but missed profit forecasts due to lower interest income and forex
loss. We essentially retain our estimates and maintain our TP and OP rating.
Impact
 Conference Call Takeaways. The key highlights of the call were: 1) In the
words of TCS management, the macro environment is nervous but clients on
the ground are driving projects to drive efficiencies; 2) BFSI sector seeing
strong growth from compliance & M&A related work; 3) Pricing outlook stable;
4) Deal pipeline very strong; 5) No signs of slow down in discretionary spend.
 Is pricing beginning to crack? TCS reported second consecutive quarter of
dip in realisation (down 95bp QoQ in 2Q and 50bp QoQ in 1Q). Management
maintains that it sees no reason to be worried on pricing, albeit the price
improvements it had earlier anticipated in the year would not materialise. We
note that our model has built in no pricing uptick through the next six quarters.
 2H to be slower than 1H. TCS has had a very strong 1H FY12 with volume
growth at 6.3% in 2Q on back of 7.5% in 1Q. Unlike peer Infosys the company
does not expect growth to be evenly spread out across four quarters and
normal seasonality would play out for TCS even this year. To meet our FY12
est. TCS would need to achieve 4% and 3% QoQ growth in 3Q and 4Q, resp.
 10 deals signed of US$100m in 2Q. TCS saw strong deal signings with 5 in
North America, 4 in Europe & UK and 1 in Latin America. The industry
breakup was 2 signings in Telecom and BFSI, 1 each in Hi-tech, retail, Energy
and Pharmaceutical. Based on 2 new deals in the Telecom space we could
see Telecom to report +ve growth in coming quarters. See Fig 1 & 2.
 2Q results details: TCS reported US$ revenues of US$2,525m (up 4.7%
QoQ). In INR terms the revenue growth was 8% QoQ and EBIT margins were
up 90bps at 27.1%. The EPS of Rs12.5 was 4% below our estimate due to
lower Other income and higher than anticipated forex loss. (Please see detailed
results table on page 3). Utilisation remained constant at 83% and TCS had
20K gross employee addition in the quarter.
Earnings and target price revision
 Updating for 2Q. FY12-13 EPS estimates vary by 1-2%. No change in TP.
Price catalyst
 12-month price target: Rs1,230.00 based on a DCF methodology.
 Catalyst: CY12 Client budget finalizations
Action and recommendation
 Retain OP. We continue to like TCS for its steady volume growth performance.
Concerns on pricing and better 2H growth prospects at peer Infosys could weigh
on the stock in the near term.