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TCS (TCS)
Technology
The difference lies in execution. TCS reported another quarter of exceptional
performance; revenue, EBITDA and net income were better than our above-consensus
estimate. Industry-leading growth despite significantly larger size and without
compromising on financial discipline speaks volumes of TCS’ execution. We retain our
above-consensus estimates – revenue growth (28.6%) and EPS of Rs54.5 (22.5%
growth) for FY2012E. Maintain BUY rating with an unchanged target price of Rs1,350
A solid all-round performance
Another quarter of excellent performance – revenue growth of 7.5% qoq to US$2,412 mn was
0.7% ahead of our estimate. EBIT margin of 26.2% (higher than Infosys) was in line with our
estimate and declined 210 bps qoq. Net income was flat qoq at Rs23.8 bn and grew 28% yoy.
These results once again demonstrate (1) strength of the TCS’ execution engine; and (2) strength
of demand environment.
Volume-led broad-based growth
Volumes grew 7.4% qoq while pricing declined 50 bps (due to change in revenue mix) in constant
currency terms with the balance 60 bps contributed by favorable cross currency movements.
Revenue growth was broad-based across verticals with telecom (+14% qoq) and retail (+11%)
leading the way. BFSI growth was a solid 5.8% qoq. Among services lines, infra management and
testing services grew at 12% qoq each. Client metrics also showed good improvement.
Expect a strong FY2012E. TCS is making rapid strides in expanding addressable size
Even as the TCS management focused a lot on global uncertainty as a potential source of concern,
there are encouraging signals on demand environment, including (1) growth, which was BFSIdependent,
is now broad-based across verticals, geographies and service offerings; (2) increasing
participation and win rate in large transformation deals. TCS signed 10 large deals during the
quarter. TCS also signed a few deals and has a strong deal pipeline in the European geography
and (3) willingness of clients to spend on large transformation projects. Pace of decision-making
remains unchanged, per TCS. We maintain 28.6% US$ revenue growth for FY2012E and pencil
22.2% growth for FY2013E.
Estimates maintained, BUY rating retained
We broadly maintain our higher-than-consensus revenue/EPS estimates for FY2012/13E. Expansion
of addressable market, well-oiled supply engine, market share gains and dominance in leadership
verticals will support industry-leading growth even as it is larger in size than peers. Our target price
of Rs1,350 is based on Gordon DDM model and implies a P/E multiple of ~21X FY2013E.
Supply side is well-managed; high utilization is not a concern
TCS stands out among the peer group on supply-side management. The company enjoys
preferred employer status among freshers as well as laterals and has the lowest attrition rate
in the industry. This helps in better bench management and demand fulfillment. The
company has delivered 34% yoy US$ revenue growth despite running at 82-84% ex-trainee
utilization for the past four quarters. In contrast, Infosys is struggling to staff projects despite
running at 73% ex-trainees utilization. We once again emphasize that demand is not a
concern for the industry at this point. Growth will be determined by the strength of the
execution engine. TCS has done better on this aspect as compared to peers.
Company confident of managing operating margin at 27%
TCS’ EBIT margin declined 210 bps qoq to 26.2%, in line with our estimate. Reason for
margin decline includes (1) 250 bps impact from compensation revision; (2) positive 10 bps
from overall currency movements (negative Re/US$ and positive cross-currency movement) ;
(3) balance a combination of offshore shift in revenues (+ve) and higher SG&A investments
(-ve) and (4) shift in revenue mix to emerging markets and higher component of passthrough
revenues. TCS expects FY2012E operating margin (EBIT) of 27%, a decline of 110
bps over FY2011. We believe that impact from some of the above factors can partly be
mitigated through modest pricing gain and pyramid expansion.
Other highlights
�� Gross headcount addition for the quarter was 11,988. Net headcount addition was a
modest 3,576 employees. Close to 75% of gross recruitment in India for the quarter were
laterals.
�� TCS retained its 60,000 gross hiring target for FY2012E.
�� Attrition on an LTM basis increased marginally to 14.8%. On quarterly annualized basis
attrition increased to 16.8%, up 100 bps qoq.
�� End-June 2011 hedge book stood at US2.3 bn.
�� Debtor days went up to 89 days from 85 in 4QFY11.
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