Tata Consultancy Services (TCS.BO) Neutral: Strong Execution, Partly Priced In Citi Research

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Tata Consultancy Services (TCS.BO)
Neutral: Strong Execution, Partly Priced In
 Macro trends — TCS mentioned that with budgets given to several CIOs largely
being flattish, they are faced with the need to self-fund discretionary spends
through simplification and rationalization of commoditized services. Enquiries
from Europe are on the rise, even from countries like Austria and Italy, where
traditionally outsourcing was under-penetrated due to language/labor constraints.
 BFSI outlook — TCS expects growth to be driven by increasing penetration
across client segments, while large accounts will still grow on an absolute level.
Growth opportunities also exist in new technologies and pseudo-discretionary
projects. BFSI growth in Q3 was slower than the corporate average due to the
macro environment as European BFSI projects are largely in Markets/Banking,
which is a more volatile segment. While Q3 had a lot of uncertainty in the macro,
Q4 saw some turnaround in the US and a slight recovery in Europe.
 How is Europe market different from the US? — (1) Higher share of
investment banking – being more English-speaking and international than retail
banking, which is more localized. (2) Higher share on onsite with a need for more
front ending consultants. TCS targets to achieve 50-60% offshore and split the
rest evenly between local hiring and Indian employees onsite. (3) Traditionally
higher billing rates. (4) More consensus driven decision making cycles – need
more pilot tests. TCS expects to have an edge over EU heritage vendors by
virtue of more integrated offshore processes and would explore tuck-in
acquisitions to build a front-end in Europe.
 Innovations in BFSI — (1) Investments in customer experiences; (2) Take
offerings available to high-end clients to lower end-users; (3) Big Data; (4)
Risk/Analytics. TCS expects mobility to be a key investment area in BFSI and
has employed ~3000 engineers in this segment. Investments are expected to be
driven by (1) Getting existing online platforms into different forms like tablets/
phones and (2) Making form-factor adjustments for new apps leads to CRM
based applications.
 BPO takeaways — We also had a detailed meeting with TCS BPO, where it
highlighted its capabilities and performance and walked us through one of the
processes, to highlight the kind of work it does. TCS has done a great job of
leveraging the Citi acquisition - the revenues are meaningfully higher than when
the acquisition happened in addition to getting multiple large BFSI names on
board of the back of those capabilities. In addition, Diligenta continues to ramp up
well with the recently announced Friends Life deal.
 Remain Neutral — TCS is up ~8% YTD, marginally outperforming BSEIT, and
continues to trade at premium valuations (~19x FY13E). With INR appreciating
~7% YTD and macro headwinds, it is difficult to see upside to consensus
estimates, which will be needed to rise from present levels. Management
commentary was also more cautious after Q3 results than in the recent past. We
maintain Neutral on the stock.