Outlook more encouraging than anticipated… • TCS :: ICICI Securities, report

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Outlook more encouraging than anticipated…
• TCS reported in line Q3FY15 earnings. US$ revenues were flat QoQ
at $3,931 million vs. our 0.1% decline and $3,925 million estimate
• Constant currency (CC) revenues grew 2.5% QoQ led by realisations
(up 230 bps) and helped by volumes (up 40 bps)
• EBIT margins improved 19 bps QoQ to 27% (26.8% estimate) while
reported PAT of | 5,444 crore was modestly ahead of our | 5,313
crore estimate led by revenue and margin beat
Readings from ISG’s call: Healthy pick-up in deal activity…
ISG in its Q4CY14 Outsourcing Index conference call said the annual
contract value (ACV > $5 million) grew 25% QoQ and 27% YoY to $5.8
billion led by mega-relationship awards. ITO ACV of $4.1 billion grew 13%
YoY and 19% QoQ while BPO ACV ($1.7 billion) grew 80% YoY and 41%
QoQ. Americas ($2.1 billion) ACV’s grew 8% QoQ (43% YoY) while EMEA
($3.1 billion) grew 34% QoQ (19% YoY). As for 2014, at $23.1 billion,
ACVs were up 16% YoY led by ITO ($17.3 billion, up 19% YoY) while BPO
($5.8 billion, 8%) was uneven. Americas ($8.2 billion, 22%) gains were
helped by strength in financial services both in ITO & BPO and Brazil &
Canada. EMEA ($11.9 billion, 7%) gains were helped by UK, France and
rising activity in the infrastructure space.
Maintaining estimates as Q3 earnings in-line…
We continue to maintain our estimates given in-line Q3 earnings and
expect dollar revenues to grow 16% in FY15E and 16.5% in FY16E, which
translates to FY14-16E CAGR of 16.2%. The demand environment across
verticals (financial services, life sciences, manufacturing, high-tech,
telecom and media), geographies (the US, UK, Europe, India) and services
(digital, IMS, enterprise solution, assurance) continue to be encouraging.
However, energy, retail, Diligenta and LatAm are challenged and thus
creating growth volatility. CY15E spends may be driven by digital
(customers are beginning to spend as pilot’s conclude), simplification &
governance. Ramp ups are generally on schedule & pipeline is healthier
both from a quality & quantity perspective (signed seven large deals).
Margins surprise positively…
At 27%, EBIT margins rose 19 bps QoQ and were modestly above our
26.8% estimate led by rupee and operational efficiency and continue to
be within the aspirational 26-28% band. We continue to model 234 bps
decline in FY15E margins primarily led by wage hike, visa costs,
depreciation charge, integration costs and cross currency headwinds
while those in FY16E could decline 35 bps.
Operating metric continues to be healthy
Client metric continues to be healthy as TCS added 21 clients to the $1
million+ bucket. Client transitions were also good as 18 transitioned to
US$ 5-10 million bucket, three to $20-50 million, two to $50 million+ and
one to $100 million+. At 86.7%, ex-trainees utilisation topped the
historical high of 86.2% in Q2 and continues to be significantly above its
FY09-14 average of 81.8% led by scale benefits.
Demand trends intact; maintain BUY
We estimate rupee revenue, EPS CAGR of 15.4%, 13.5% in FY14-16E
(average 26.9% EBIT margins in FY15-16E), vs. 24%, 30% reported during
FY09-14 (average 27% margins), respectively, 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 rating.
LINK
http://content.icicidirect.com/mailimages/IDirect_TCS_Q3FY15.pdf