Nothing changes: Will still grow faster than peers… • TCS -BUY :: ICICI Securities

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Nothing changes: Will still grow faster than peers…
• TCS reported lower than anticipated Q2FY15 earnings with $ revenue
growing 6.4% QoQ (7.5% estimate) to $3.93 billion ($3.97 billion
estimate), led by weakness in insurance, telecom and LatAm
• Constant currency (CC) revenues grew 7.4% QoQ including
Mitsubishi JV contribution (280 bps). Organic CC revenues grew
4.6% QoQ led by volumes (6.1%)
• EBIT margins improved 55 bps QoQ to 26.8% (26.5% estimate).
Reported PAT of | 5,288 crore was above our | 5,187 crore estimate
led by margin beat and higher other income
• The company announced an interim dividend of | 5/share and
announced the merger of its subsidiary, CMC, with itself. Merger
ratio stands at 79 shares of TCS for every 100 shares held in CMC
Moderates organic FY15E guidance on high asking rate…
TCS moderated its organic growth guidance for FY15E. Recall, at the start
of the year, TCS had guided for better-than-FY14E growth (16.2% YoY) in
FY15E. Adjusting for JV contribution in Q2, the asking rate for achieving
16.2% YoY is ~4% each in Q3, Q4 and achieving the same could be tricky
given the softness in retail, LatAm and Insurance especially Diligenta. That
said, the company noted that Q3 and Q4FY15E sequential growth rates
may still better those reported in Q3 (3%) and Q4FY14 (1.9%). Assuming
similar growth rates yield organic YoY growth of 15.2% for FY15E, which
could still be industry leading within the tier-I space, despite coming-off
from a high base of 16.2% in FY14, 13.7% in FY13 and FY09-14 CAGR of
17.4%. We now expect $ revenues (including JV) to grow 18% in FY15E
vs. 19.1% earlier which translates to FY14-16E CAGR of 18% vs. 18.7%
earlier.
Margins continue to surprises positively
At 26.8%, EBIT margins rose 55 bps QoQ and came modestly above our
26.5% estimate led by operational efficiency, absence of additional
depreciation charge similar to Q1FY15 and currency tailwinds, partially
offset by Japan JV integration costs. TCS margins continue to be stable;
in line with FY09-14 average of 27%, and within its aspirational 26-28%
band. We now expect FY15E margins to decline 213 bps YoY to 27%
primarily led by wage hike, visa costs, depreciation charge, integration
costs and cross currency headwinds.
Operating metric continues to be healthy
TCS has signed eight large deals in Q2 with five of them in the US, two in
Europe and one in the UK. From a vertical perspective, deals were spread
across banking (2), manufacturing (2), and one each in utilities, energy,
transportation and healthcare. Client metric continues to be healthy as it
added 19 clients to the $1 million+ bucket. Client transition was also good
as five clients transitioned to the $20-50 million bucket while four moved
to the $50 million+ bucket. At 86.2%, ex-trainees utilisation topped the
historical high of 85.3% in Q1 and continues to be significantly above its
FY09-14 average of 81.8% led by scale benefits.
Overall demand trends intact; maintain BUY
We estimate TCS will report revenue, EPS CAGR of 16%, 14% in FY14-
16E (average 27.2% EBIT margins in FY15-16E), vs. 24%, 30% reported
during FY09-14 (average 27% margins), led by superior execution and its
ability to win large deals. We continue to value TCS at | 2,900 (22.5x our
FY16E EPS estimate of | 128) and maintain our BUY recommendation

LINK
http://content.icicidirect.com/mailimages/IDirect_TCS_Q2FY15.pdf