Earnings Update - TCSQ3FY12 :: CSEC Research

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Earnings Update - TCSQ3FY12

 

 Dear All,

Exchange tailwind pushed the revenue growth higher…

Revenues during the quarter was tad above our expectation, reported at Rs. 132,040mn (CSEC est. of Rs. 131,110mn) a sequential growth of 13.5%. Volume grew 3.2% sequentially, coupled with exchange and realization aiding 8.95% and 2% respectively, which pushed the rupee revenue run rate. However the effort mix dragged to the tune of 64bps.

TCS posted an EBIT of Rs. 38,618mn a sequential growth of 22.4% and the margins expanded by 213 bps on a sequential basis to 29.24% v/s 27.11% in the previous quarter.

Outlook:

In a survey conducted by management with its top 120 clients, 96 clients have finalized their budget, of which 2/3rd of its client’s budget will be flat or marginally up. Though we believe the IT budget gives an indication of the demand outlook; in this current uncertain environment, budget makes little or no sense, as clients may or may not spend their entire budget, as evidence from the delay in decision making and higher scrutiny in discretionary project.

Though the macro economic condition remains challenging, we continue to remain cautiously optimistic on the growth outlook of the sector. We continue to overweight on TCS as it is positioned well to grab market share from vendor consolidation activity and new deal wins from first time outsourcers in continental Europe (revenue share from continental Europe has gone up by 160 bps from 8.9% in Q1FY11 to 10.5% in Q3FY12). Moreover it has already given 44,000 campus offers for next year to aid volume growth.

At current market price the stock is trading at a multiple of 19.9X and 16.9X of FY12E (Rs.54.3) and FY13E (Rs.63.5) earnings. We rate TCS as an “Outperformer” with a price target of Rs. 1,270 based on 20XFY13E earnings.

Regards,

CSEC Research