Visit http://indiaer.blogspot.com/ for complete details Re-rating contender…
TCS reported strong Q2FY11 numbers which beat our as well as
consensus estimates. Q2FY11 revenues grew 13% QoQ and 25% YoY to
Rs 9286 crore, while EBIT margins improved 86 bps QoQ. After almost
five quarters of relative out-performance compared to Infosys, we
believe, the P/E discount rationale would subside. Consequently, we are
modestly raising estimates coupled with our P/E multiple (22x vs. 21x
earlier) to arrive at our Rs 1056 price target
Solid beat
Banking financial services & insurance (44% of revenue grew 10%
QoQ vs. 7.1% in Q1FY11. Retail, telecom & manufacturing grew
11%, 13% & 12% QoQ, respectively, led by demand across service
lines. Continental Europe bounced back with 14.2% QoQ growth,
while UK grew 13% QoQ. India, 10% of revenue, saw demand up
tick and grew 25% QoQ. North America continued its momentum
with 9% QoQ growth on top of 8.4% and 6.1% QoQ growth in
Q1FY11 and Q4FY10. Active client roster increased to 936 vs. 930 in
Q1FY11 as TCS added 30 new clients.
EBITDA transitioning towards segment leader
EBITDA margins improved 70bps QoQ despite headwinds from
promotion (166 bps) and a >100% variable pay-out, as revenue
productivity (95 bps), SG&A (54 bps) and F/X (103 bps) created
margin tailwinds. Margin improvement was also helped by lower
rental cost & write-back of doubtful debts provision. However,
operating cash flow to revenue ratio declined to 16.4% in H1FY11
vs. 24% in FY10.
Valuation
We expect TCS broad based volue growth to continue and have revised
our US dollar revenue growth to 23% CAGR vs. 22% CAGR earlier over
FY10-FY12E. Also, we have revised our EPS estimate for FY11E and
FY12E by ~5% and 4%, respectively. Thus, we value the stock at Rs
1056, 22x our FY12E EPS estimate of Rs 48 and maintain our Add rating
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