Visit http://indiaer.blogspot.com/ for complete details EARNINGS REVIEW
Tata Consultancy Services Ltd. (TCS.BO)
Neutral
Above expectations on broad-based growth; Neutral on valuation
What surprised us
TCS’s 2QFY11 revenues and net income were 4%/5% above GSe/ Bloomberg
consensus and 7%/9% above GSe/consensus, respectively. Revenues were
up 13% qoq led by robust 11% volume growth. TCS’s 2QFY11
outperformance was broad-based, as all verticals witnessed double-digit
sequential volume growth. BFSI remained strong with 11% qoq growth and
two large deal wins in the quarter. EBIT margins expanded 70 bp qoq
despite increased hiring (9.6k net adds), as utilization (incl. trainees) ramped
up by 290 bp to 77.7%. TCS increased its FY11E gross hiring guidance to 50k
employees (from 40k), signaling strong revenue growth expectations and a
robust deal pipeline. UK and continental Europe saw mid-teens sequential
growth despite economic headwinds; management suggested marginal
impact from spending cuts in the EU on its current deals including PADA.
Despite being comfortable about volumes for the next two quarters,
management stated it remains cautious on revenue visibility in 2011.
What to do with the stock
We stay Neutral on TCS, as we believe its industry-leading growth is priced in at
current valuation. We raise our FY11E-FY13E EPS by 2%-7%, primarily on better
revenue outlook. Hence, we raise our 12-m Director's Cut-based TP to Rs997
(from Rs984), implying 2% upside. Among the large cap Indian IT space, we still
prefer TCS over Infosys (INFY.BO, Neutral, Rs3,033.15) and Wipro (WIPR.BO,
Neutral, Rs469.75), owing to its higher revenue CAGR of 19% over FY11E-FY13E.
Stock is trading at 20.5X FY12E EPS, a 3% discount to INFY/WIPR. Risks: faster
economic recovery (upside); currency volatility (downside).
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