TCS - Neutral -2QFY2011 Result Update:: Angel Broking

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Tata Consultancy Services - Neutral -2QFY2011 Result Update
Stellar double-digit revenue growth: For 2QFY2011,
TCS posted higher-than-expected revenue of US $2,004mn
(v/s our estimate of US $1,927mn), with double-digit growth
of 11.7% qoq. This is the first quarter ever when TCS reported
incremental revenue of US $210mn qoq (against Infosys at
US $111mn).
Strong growth was possible on the back of robust volume growth
of 11.2% (v/s our estimate of 8.1%). Revenue growth again
was broad-based in the true sense, as all the verticals and
services posted double-digit growth during 2QFY2011.
EBIT margin surge: EBIT margins surged by 86bp qoq,
surpassing the 28% mark. Growth was because of gains of
103bp, 95bp and 54bp due to favourable exchange rate,
improved productivity and SG&A efficiency, respectively, defying
the negative impact of 166bp from promotions and variable
allowances.
Hiring spree continues, utilisations remain unhampered: TCS
has been on the hiring spree since 3QFY2010. In 2QFY2011
itself, 10,229 employees were added in TCS Ltd. Net employee
addition in subsidiaries, including CMC, WTI, TCS e-Serve and
Diligenta, also stood decent at 488. During the quarter, attrition
rate inched up by 80bp qoq to 13.1% in TCS Ltd.; whereas, it
spiked up by whopping 250bp to 22.5% in the BPO segment.
Though hiring remained robust, utilisation including trainees
as well as excluding trainees peaked at 77.8% and 83.8%,
respectively, during the quarter. This was primarily because of
higher lateral hiring to map the surge in demand across various
verticals.
Outlook and valuation
Management highlighted that the early indications from clients
on budgets point towards an increment in IT spending for

CY2011, with a possibility of an uptick in pricing. Along with
its peers, TCS is also witnessing a trend of clients looking out to
spend on IT to drive operational efficiencies and prepare for
future growth, which is leading to a surge in transformational
projects of large sizes. Clients are outsourcing projects, like
1. consolidation of ERP as well as core banking systems, and
2. virtualisation and rationalisation of infrastructure and
applications, to drive cost efficiencies. On the back of a strong
deal pipeline, TCS has raised its hiring target yet again from
36,000 at the start of the year to 40,000 at the end of
1QFY2011 and 50,000 plus currently for FY2011.
We expect TCS to witness a 24.2% CAGR (in US$ terms) and
a 20.4% CAGR (in INR terms) in revenue over FY2010-12E.
EBITDA is expected to witness a higher CAGR at 21.4%, as the
company is reaping the benefits of SG&A investments made in
the past. We value TCS at 22x FY2012 EPS of `47.8, i.e., at par
with industry benchmark, Infosys, as it continues to bridge the
margin gap even on the back of higher scale. At current levels,
we recommend a Neutral rating on the stock.