India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Consultancy Services ------------------------------------------------------ Maintain NEUTRAL
Good results in the price
● TCS reported strong Jun-11 results with US$-revenue growth of
7.4% QoQ (CS est: 6.4% QoQ). However, EBIT margin was 50
bps lower than estimates at 26.2%. Higher other income and
lower tax rate led to PAT coming in ahead of our estimates by 7%.
● Management commentary was bullish though FY12 gross hiring
guidance was unchanged at 60,000. Management also reiterated
confidence in achieving margins of ~27% for FY12.
● This was the first quarter ever in which TCS outperformed versus
Infosys on both revenue growth as well as margins. We expect
outperformance to continue until Infosys recovers from its
restructuring, which could take at least one to two quarters more.
● We make minor changes to our model resulting in 1%/-1% change
in EPS estimates for FY12/FY13. Our TP remains unchanged at
Rs1,150. We have confidence in TCS’s ability to deliver strong
revenue growth and high margins. However, at 20x one-year
forward EPS and at 10%/30% premium versus Infosys/Wipro
respectively, we see little price upside. Maintain NEUTRAL
Good results
TCS reported growth of 7.4% QoQ in US$ terms, 1% ahead of
estimates. However, the EBIT margin dropped 210 bps QoQ to 26.2%
versus our expectation of 26.7%. Drivers behind margin drop: wage hike
(-251 bps), currency (-9 bps), offshore shift (+7 bps), productivity
improvement (+115 bps), bad debt provision (-15 bps) & other SG&A (-
61bp). Higher other income and lower tax rate led to PAT beat by 7%.
Commentary positive, hiring guidance unchanged
Management reiterated that macro-economic worries had not had any
impact on client demand. Despite this, FY12 gross hiring guidance
was unchanged at 60,000 which we consider to be mildly
disappointing. Interestingly, they mentioned that they had not seen
any lengthening of decision cycles as reported by Infosys.
Management also commented that it expected margins to improve
and that it was confident that it could achieve a full-year EBIT margin
in a narrow band around 27% (CS est for FY12: 27%)
Growing faster than Infosys
TCS’ grew over 2% QoQ faster than Infosys and compared favourably
across most operational parameters such as utilisation, attrition and
EBIT margin. Interestingly, the telecom vertical grew 14% QoQ in stark
contrast to a 7% QoQ fall for this vertical for Infosys. Similarly, it grew
7% QoQ in Europe versus 0.5% QoQ growth for Infosys in this
geography.
In our view, this outperformance could continue until Infosys recovers
from its restructuring, which could take at least 1-2 quarters more.
Management to improve client engagement even further
The number of active clients reduced (a drop of 10 QoQ) for the first
time since the Sept-09 quarter. This coincides with a dip in new client
additions to 24 versus an average of 35 over last four quarters.
Management commented that while they are satisfied with the win
rates in the areas that they are strong, they would like to increase
participation in RFPs for large deals and win rates in remaining areas.
At the same time, they remain focused on margins and commented
that they did not hesitate to walk away from deals when they didn’t like
the pricing or other deal terms (‘structure’).
Maintain NEUTRAL
We make minor changes to our model resulting in 1%/-1% change in
EPS estimates for FY12/FY13. Our TP remains unchanged at Rs1150.
We continue to have confidence in management’s ability to deliver
strong revenue growth and high margins. However, at 20x 1 year
forward EPS and at 10%/30% premium vs Infosys/Wipro respectively,
we see little upside to stock price. Hence, we maintain NEUTRAL.
No comments:
Post a Comment