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Commentary moderation and
high Street expectations make
us cautious; reaffirm Neutral
Action: Results and commentary fail to excite; reaffirm Neutral
While we like TCS for its potential to drive market share gains, we believe
3Q disappointments led by 1) commentary moderation, 2) inferior results
compared with INFO despite upbeat commentary, and 3) weakening in
cash generation trends are likely to weigh on the stock in the interim. We
remain cautious on the stock given: 1) high Street expectations built into
valuations and 2) higher risk perception associated with greater exposure
to Europe and BFSI – two segments most susceptible to a slowdown. We
would wait for better valuation comfort given these risks and hence
reaffirm our Neutral rating. We prefer HCLT/CTSH/INFO over TCS.
Catalysts: Demand moderation in BFSI/Europe key downside risk
Management commentary shows some signs of demand moderation
TCS is seeing delays in deal closures and decision making in the
discretionary segments, similar to concerns raised by INFO a quarter
back. However, it remains more upbeat on run-the-business spending. We
continue to believe that TCS will grow faster than Infosys in FY13F, but
the outperformance is likely to be moderate to 2.5% (vs ~8% in FY12F).
Further, we see greater comfort in margins and valuations at Infosys and
hence reiterate our preference for INFO over TCS.
Valuation: TP reduced to INR1,200; maintain Neutral
We expect a USD revenue CAGR of 20% and EPS CAGR of 18% over
FY11-13F. Our target price declines to INR1,200 (from INR1,230) based
on 18x one-year-forward earnings (methodology unchanged).
Commentary starting to reflect some
signs of moderation in demand
Despite growing in line with Infosys in 2Q, the more upbeat management commentary
from TCS seemed to suggest that there were no issues on demand. 3Q results were
contrary to such expectations, with TCS growing slower than Infosys (USD revenue
growth of 2.4% q-q at TCS compared to 3.4% at Infosys). Further, TCS management
has acknowledged that it is seeing delays in decision making and deal closures in the
discretionary segments. Infosys had warned about such delays in 2Q itself.
Management highlighted the following key findings post a client survey they conducted:
• Of TCS’s top 120 customers, 96 have finalized budgets and two-thirds of those clients
have indicated budgets to be flat or up while the remaining one-third have indicated
lower budgets
• Of 130 discretionary projects surveyed across markets, 50% are on track while 50%
have seen delays in decision making and/or deal closure later than scheduled.
We continue to believe that TCS will grow faster than Infosys in FY13F, but the
outperformance is likely to be moderate to 2.5%, compared to the ~8% outperformance
in FY12F. This is on account of TCS’ higher exposure to risky segments like BFSI,
Europe and its higher client concentration and our expectation that Infosys will be a
greater beneficiary of a rebound in change the business spending in 2HFY13F. In such a
scenario, and given greater valuation comfort at Infosys, we hold on to our preference for
Infosys over TCS.
Management commentary still more upbeat than Infosys
TCS management commentary for 3Q still appeared more positive than that for Infosys, in
our view – which is also partly reflected in the net employee addition of 5.6% q-q (compared
with 2.3% at Infosys), growth continuing at its top clients with no concerns, and a lower
discretionary service line exposure (25% of revenue compared with 35%+ at Infosys).
Valuation premiums at TCS not pricing in weakening in cash
flow generation
We believe the Street has not adequately priced in the worsening trend in cash flow
generation at TCS in according a ~10% premium to Infosys. We believe that with
revenue growth outperformance also moderating in FY13F, this valuation premium is
unlikely to be sustained and value Infosys and TCS at par. We would revisit our valuation
multiples if the cash flow deterioration trends persist. Management however, does not
see anything out of the ordinary in terms of the cash generation trends and believes this
is largely explained by the growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Commentary moderation and
high Street expectations make
us cautious; reaffirm Neutral
Action: Results and commentary fail to excite; reaffirm Neutral
While we like TCS for its potential to drive market share gains, we believe
3Q disappointments led by 1) commentary moderation, 2) inferior results
compared with INFO despite upbeat commentary, and 3) weakening in
cash generation trends are likely to weigh on the stock in the interim. We
remain cautious on the stock given: 1) high Street expectations built into
valuations and 2) higher risk perception associated with greater exposure
to Europe and BFSI – two segments most susceptible to a slowdown. We
would wait for better valuation comfort given these risks and hence
reaffirm our Neutral rating. We prefer HCLT/CTSH/INFO over TCS.
Catalysts: Demand moderation in BFSI/Europe key downside risk
Management commentary shows some signs of demand moderation
TCS is seeing delays in deal closures and decision making in the
discretionary segments, similar to concerns raised by INFO a quarter
back. However, it remains more upbeat on run-the-business spending. We
continue to believe that TCS will grow faster than Infosys in FY13F, but
the outperformance is likely to be moderate to 2.5% (vs ~8% in FY12F).
Further, we see greater comfort in margins and valuations at Infosys and
hence reiterate our preference for INFO over TCS.
Valuation: TP reduced to INR1,200; maintain Neutral
We expect a USD revenue CAGR of 20% and EPS CAGR of 18% over
FY11-13F. Our target price declines to INR1,200 (from INR1,230) based
on 18x one-year-forward earnings (methodology unchanged).
Commentary starting to reflect some
signs of moderation in demand
Despite growing in line with Infosys in 2Q, the more upbeat management commentary
from TCS seemed to suggest that there were no issues on demand. 3Q results were
contrary to such expectations, with TCS growing slower than Infosys (USD revenue
growth of 2.4% q-q at TCS compared to 3.4% at Infosys). Further, TCS management
has acknowledged that it is seeing delays in decision making and deal closures in the
discretionary segments. Infosys had warned about such delays in 2Q itself.
Management highlighted the following key findings post a client survey they conducted:
• Of TCS’s top 120 customers, 96 have finalized budgets and two-thirds of those clients
have indicated budgets to be flat or up while the remaining one-third have indicated
lower budgets
• Of 130 discretionary projects surveyed across markets, 50% are on track while 50%
have seen delays in decision making and/or deal closure later than scheduled.
We continue to believe that TCS will grow faster than Infosys in FY13F, but the
outperformance is likely to be moderate to 2.5%, compared to the ~8% outperformance
in FY12F. This is on account of TCS’ higher exposure to risky segments like BFSI,
Europe and its higher client concentration and our expectation that Infosys will be a
greater beneficiary of a rebound in change the business spending in 2HFY13F. In such a
scenario, and given greater valuation comfort at Infosys, we hold on to our preference for
Infosys over TCS.
Management commentary still more upbeat than Infosys
TCS management commentary for 3Q still appeared more positive than that for Infosys, in
our view – which is also partly reflected in the net employee addition of 5.6% q-q (compared
with 2.3% at Infosys), growth continuing at its top clients with no concerns, and a lower
discretionary service line exposure (25% of revenue compared with 35%+ at Infosys).
Valuation premiums at TCS not pricing in weakening in cash
flow generation
We believe the Street has not adequately priced in the worsening trend in cash flow
generation at TCS in according a ~10% premium to Infosys. We believe that with
revenue growth outperformance also moderating in FY13F, this valuation premium is
unlikely to be sustained and value Infosys and TCS at par. We would revisit our valuation
multiples if the cash flow deterioration trends persist. Management however, does not
see anything out of the ordinary in terms of the cash generation trends and believes this
is largely explained by the growth.
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