Tata Consultancy Services (TCS) Q1FY13 revenue of USD2,728mn was in
line with our estimate (USD2,727mn) while earnings of INR32.8bn was
marginally above our estimates of INR32.1bn on the back of a higher
volume growth of 5.3% as against our expectation of 3.7%. Growth was
broad based with BFSI and telecom verticals growing by 5% and 6.1%
respectively. We maintain our 14.5% USD revenue growth for FY13E and
expect the momentum to be sustained thanks to its continued
investments in sales and marketing. Although, we believe that the
company has delivered consistently in last few quarters we maintain our
‘HOLD’ on the stock given the rich valuations.
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Healthy volume spur growth, India, energy vertical disappoint
The company posted a revenue of USD2,728mn with a steady volume growth of 5.3%
though pricing declined 1% QoQ. Operating margin (EBIT) dipped by just 20bps despite
wage hikes during the quarter. The only blip during the quarter was the 7% (CC) decline
in Indian revenue as well as Energy & Utility vertical which fell by 2.4% on reported
basis. We believe that this performance in an uncertain environment is the result of
TCS investments in selling and marketing efforts and will enable it to sustain the
momentum going forward.
BFSI, retail and telecom perform well, BPO stands out
Growth during the quarter was seen across most verticals with BFSI, retail and telecom
posting a strong growth of 5%, 8.8% and 6.1% respectively. Geographically, there was a
robust performance in Europe (up 9.6% QoQ).Within service lines, BPO, Ent. solutions
and assurance services posted a solid growth of 16.5%, 5.8% and 7.3%, respectively.
We like to note that to the incremental revenue of USD80mn during the quarter, BPO
contributed USD50mn.
Outlook and valuations: Limited upside; Maintain ‘HOLD’
The company continued to post an all round performance in terms of growth and
margins in an uncertain environment. Based on its positive commentary on all verticals
and markets, we believe that the stock, though expensive, will trade with an upward
bias. We increase the target multiple of the company from 17x to 18x given its higher
growth potential vis-à-vis peer-set and maintain our ‘HOLD’ rating with a revised target
price of INR1,350 (at 18x FY14e EPS).
• Net income: TCS reported a net income of INR32.8bn, up 11.9% QoQ. Net profit margin
was flat at 22.1%.
Client addition: Client addition was relatively weaker as just 29 clients were added
during the quarter (42 in Q4FY12). Active clientele stood at 1,032 versus 1,037 in the
previous quarter. The number of USD1mn clients increased by 5 to 527; there was an
increase in USD5mn (14), USD10mn (5), USD20mn (6) and USD50mn (3) client brackets
over the previous quarter. TCS won eight deals during the quarter, of which, three are
from BFSI vertical, two in retail and one each from pharma, media and telecom verticals.
• Geography split: All geographies, except India and APAC, reported a sequential growth
during the quarter led by UK and North America which grew 15.2% and 2.8% QoQ,
respectively. MEA grew 3.0%. India and APAC declined by 13.9% and 1.0% on a QoQ
basis .
• Hiring momentum continues: Gross addition stood at 13,831 on the back of 19,156 in
the previous quarter while net addition was 4,962. Total headcount stands at 243,545.
Attrition (LTM) in IT services declined to 10.9% from 11.1% in the previous quarter. It
has maintained the gross hiring guidance at 50,000 for FY13.
• Utilisation inches up: Utilisation rate (excluding trainees) inched up 70bps QoQ to
81.3%; including trainees, it surged 100bps QoQ to 72.3%.
Company Description
TCS is India's largest and one of its oldest IT companies. It commenced operations in 1968
and provides a comprehensive range of IT services to industries such as banking and
financial services, insurance, manufacturing, telecommunications, retail, and transportation.
With a presence in 42 countries, TCS is positioned to deliver its services seamlessly. TCS has
a large diversified client base (1037 active clients), TCS’ employee force stands at 243,545
(including subsidiaries) and its revenues for the last twelve months (TTM) stood at INR530bn
(USD10.4bn).
Investment Theme
As India's largest and most-experienced IT services firm, TCS is well-positioned to benefit
from the growing demand for offshore IT services. It is a serious contender for winning large
deals, as it has more experience than peers in implementing large, complex, and missioncritical
projects. TCS has multiple margin levers at its disposal, which we believe, will sustain
its margins, shielding it from continued pressures on account of wage increases across the
industry. End-to-end full services offerings, traction in emerging markets, ability to roll up
large acquisitions, improving sales and marketing prowess and willingness to take multiple
big bets (different go-to-market models) are among the key rationales for TCS to sustain its
long term hi-growth trajectory. We believe current rich valuations builds in a robust revenue
and earnings growth and leaves a limited potential upside from current levels.
Key Risks
Key risks to our investment theme include – (1) double dip recession in major market US and
prolonged slowdown in Europe (2) sharp cross currency movements and appreciation of
rupee against USD, Euro and GBP (3) pricing pressure and (4) reduction in margins.
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