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We met TCS management and key takeaways include i) it remains confident on broad based
growth for FY12E except for telecom where demand visibility remains weak; ii) not witnessed any
demand pull back yet following increased macro concerns. Recent sharp correction offers
opportunity to buy.
TCS remains confident while entering FY12
Our interactions with the management clearly indicates that TCS is poised to deliver another
sector leading USD revenue growth in FY12 despite its high base. We believe that TCS would
again deliver sector leading qoq growth in revenues in 1Q12 despite posting 7.4% qoq growth
rate in USD revenues in last four quarters and its highest base versus peers. Even for 2Q12,
our interaction indicates that TCS will maintain a seasonal trend of posting better growth rates
than 1Q12.
The company expects broad base growth in FY12 except for Telecom. It continues to witness
improved deal pipeline with increasing number of deals as well as size. This corroborates our
view that TCS has been diversifying itself beyond BFSI and other penetrated verticals
including telecom, manufacturing and retail.
In its largest vertical BFSI, despite registering healthy growth in FY11 and demand from M&A
deals tapering off, management remains confident to achieve at least company average
growth within BFSI (which contributed 44% of revenues in 4QFY11). Higher confidence stems
from improved discretionary spend and higher demand for services including risk,
compliance, mobility, business/customer analytics and web solutions. Surprisingly TCS sees
higher demand for discretionary work from UK besides US. Even for its BFSI product suite,
TCS is positive on its deal pipeline though it is largely concentrated in Non-US markets.
Outside BFSI, TCS remains confident on broad-based recovery except for Telecom. TCS is
witnessing higher deal pipeline of traditional outsourcing deals in Manufacturing and
Energy/Utility.
Regarding the sovereign debt crisis in some countries of Europe, TCS re-iterated its view of
no major concern as of now considering negligible revenue concentration from troubled Euro
zone. However it is watchful relating to any indirect impact through its clients' exposure within
these region.
We do agree that any further deteriorating macro within Western economy will play spoil sport
to TCS's and our optimistic demand view. However our recent interaction across large caps
indicates no abnormal signs of slowdown witnessed yet.
Confident of achieving EBIT margins of 27% in FY12
Besides higher revenue growth expectation, TCS remains confident on achieving 27% EBIT
margin (in line with our estimate) versus 27.8% in FY11. We believe that room for surprise
can be high considering management confidence on robust volume visibility and resulting
higher gains through SG&A leverage, employee pyramid adjustments (looking to recruit
freshers at 52-53% of gross recruits in FY12 versus 46% in FY11) and any higher than
expected pricing uptick.
Regarding pricing, the management remains positive (surprisingly more so in BFSI) on uptick
on renewals. It expects gradual uptick within pricing with generally around one-third of
revenues getting renewed every year.
Regarding non-linear initiatives, it remains positive on iON (cloud based SMB platform
currently launched in India) is gaining traction with 200 clients already signed, up from 80-100
during February 2011. Even regarding Diligenta, it expects improving profitability in FY12
versus FY11. Diligenta reported 27.4% increase in revenues to Rs5.8bn with PAT increasing
to Rs305.6mn (5.3% of revenues) in FY11 versus net loss of Rs555.9mn in FY10.
Visa issues not disrupting business
Despite increased scrutiny as well as some uptick in visa rejection rates, TCS does not
expect any business disruption due to visa issues going forward. It believes that increase in
rejection rates are currently within manageable levels.
Valuation and View
We believe that recent correction in the stock (on increasing concerns relating to visa issues
as well as macro) offers a good opportunity to buy. We believe that risk-reward is favourable
considering no major impact on business seen yet from macro concerns or visa issues.
Key risk to our call would be any further deterioration in western economies and resulting
downgrades in EPS as well as valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We met TCS management and key takeaways include i) it remains confident on broad based
growth for FY12E except for telecom where demand visibility remains weak; ii) not witnessed any
demand pull back yet following increased macro concerns. Recent sharp correction offers
opportunity to buy.
TCS remains confident while entering FY12
Our interactions with the management clearly indicates that TCS is poised to deliver another
sector leading USD revenue growth in FY12 despite its high base. We believe that TCS would
again deliver sector leading qoq growth in revenues in 1Q12 despite posting 7.4% qoq growth
rate in USD revenues in last four quarters and its highest base versus peers. Even for 2Q12,
our interaction indicates that TCS will maintain a seasonal trend of posting better growth rates
than 1Q12.
The company expects broad base growth in FY12 except for Telecom. It continues to witness
improved deal pipeline with increasing number of deals as well as size. This corroborates our
view that TCS has been diversifying itself beyond BFSI and other penetrated verticals
including telecom, manufacturing and retail.
In its largest vertical BFSI, despite registering healthy growth in FY11 and demand from M&A
deals tapering off, management remains confident to achieve at least company average
growth within BFSI (which contributed 44% of revenues in 4QFY11). Higher confidence stems
from improved discretionary spend and higher demand for services including risk,
compliance, mobility, business/customer analytics and web solutions. Surprisingly TCS sees
higher demand for discretionary work from UK besides US. Even for its BFSI product suite,
TCS is positive on its deal pipeline though it is largely concentrated in Non-US markets.
Outside BFSI, TCS remains confident on broad-based recovery except for Telecom. TCS is
witnessing higher deal pipeline of traditional outsourcing deals in Manufacturing and
Energy/Utility.
Regarding the sovereign debt crisis in some countries of Europe, TCS re-iterated its view of
no major concern as of now considering negligible revenue concentration from troubled Euro
zone. However it is watchful relating to any indirect impact through its clients' exposure within
these region.
We do agree that any further deteriorating macro within Western economy will play spoil sport
to TCS's and our optimistic demand view. However our recent interaction across large caps
indicates no abnormal signs of slowdown witnessed yet.
Confident of achieving EBIT margins of 27% in FY12
Besides higher revenue growth expectation, TCS remains confident on achieving 27% EBIT
margin (in line with our estimate) versus 27.8% in FY11. We believe that room for surprise
can be high considering management confidence on robust volume visibility and resulting
higher gains through SG&A leverage, employee pyramid adjustments (looking to recruit
freshers at 52-53% of gross recruits in FY12 versus 46% in FY11) and any higher than
expected pricing uptick.
Regarding pricing, the management remains positive (surprisingly more so in BFSI) on uptick
on renewals. It expects gradual uptick within pricing with generally around one-third of
revenues getting renewed every year.
Regarding non-linear initiatives, it remains positive on iON (cloud based SMB platform
currently launched in India) is gaining traction with 200 clients already signed, up from 80-100
during February 2011. Even regarding Diligenta, it expects improving profitability in FY12
versus FY11. Diligenta reported 27.4% increase in revenues to Rs5.8bn with PAT increasing
to Rs305.6mn (5.3% of revenues) in FY11 versus net loss of Rs555.9mn in FY10.
Visa issues not disrupting business
Despite increased scrutiny as well as some uptick in visa rejection rates, TCS does not
expect any business disruption due to visa issues going forward. It believes that increase in
rejection rates are currently within manageable levels.
Valuation and View
We believe that recent correction in the stock (on increasing concerns relating to visa issues
as well as macro) offers a good opportunity to buy. We believe that risk-reward is favourable
considering no major impact on business seen yet from macro concerns or visa issues.
Key risk to our call would be any further deterioration in western economies and resulting
downgrades in EPS as well as valuations.
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