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Holding all the aces
TCS’ 2Q11 results were significantly ahead of our expectations, driven by robust
all-round growth. We are more upbeat about industry demand, given the strong
results by large players so far for the Sept quarter. We raise FY11/12F EPS 5-6%,
largely driven by revenue upgrades. Reiterate Buy with a revised TP of Rs1,100.
2Q11 results: revenues beat expectations; margin adjusted for one-offs slightly better
Consolidated revenues were up 11.7% qoq to US$2.0bn (RBS estimate +6.9%) and 13.0%
in INR terms to Rs92.9bn. Ex-equipment sales (+52.7% qoq), revenues were up 10.4% qoq .
Volumes were up 11.2%, while realisations, net of a 26bp dip in pricing, were up 0.6%. The
EBITDA margin was up 72bp qoq to 30.0% (RBS estimate -18bp). However, excluding some
one-offs (bad debt provision reversals and dip in rental costs), adjusted margins were up
5bp, despite a higher variable payout (150% of baseline vs 100% in 1Q11). PAT was up
14.2% qoq to Rs21.1bn, factoring in an FX loss of Rs0.5bn.
While revenue traction was impressive, all-round growth was the highlight
We find the balanced growth during the quarter most impressive – laggards Europe (+13.6%)
and Manufacturing (+11.7%), as well as discretionary services like Consulting (+11.7%),
Enterprise Solutions (+17.4%) and Business Intelligence (+15.9%) all exhibited strong
growth. Management raised its hiring target for FY11 from 40,000 to 50,000, while also
commenting that utilisation could sustain/marginally improve historically high levels, clearly
highlighting its confidence in continuing all-round growth.
Quarterly reports/comments so far suggest visibly strengthening demand
US$ revenues of large players that have reported so far (TCS, Infosys and HCL Tech)
cumulatively grew 10.7% yoy (6.1% in 1Q11), driven by a 9% growth in volumes. Revenues
from Europe (24% share) were up 16% (c13% ex-cross currency), indicating a shortening
decision cycle. While caveats on macro concerns were expected, on-the-ground activity and
early 2011 budget feelers are positive (flat-positive from Infosys and up from TCS).
Target valuation in line with Infosys; reiterate Buy with TP of Rs1,100
We raise FY11/12F US$ revenues by 4-6% and margins by 54-64bp, given strong revenue
growth and operating leverage (utilisation assumptions up 75-146bp). At our revised target,
the stock is valued at 21x one-year forward rolling EPS, in line with Infosys. Reiterate Buy.
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