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Tata Consultancy
Reuters: TCS.BO Bloomberg: TCS IN Exchange: BSE Ticker: TCS
Meeting takeaways: no signs of demand weakness
Demand continues to be strong with stable pricing
In our meeting yesterday, TCS' CFO confirmed that despite the deterioration in the
global macroeconomic environment, demand for IT services continues to be
strong and there have been no delays in clients’ decision making. The company
does not see any early signs indicating spending cuts by clients in CY12. However,
even if there were a recession, the company believes demand is unlikely to visit its
FY10 lows and TCS is better equipped to weather a recession. We continue to
rate TCS as our top pick; Buy recommendation and a target price of INR1,460.
Balanced portfolio of services and geographical exposure
TCS’ management noted that IT service spending has not reached the highs
witnessed in CY07. Therefore, in case of a recession, clients are unlikely to reduce
spending as drastically as in CY08-09 as there is very little flexibility on pricing.
Moreover, TCS is also likely to fare better than peers due to (1) balanced deal
wins, (2) a defensive portfolio of services, (3) reduced vertical concentration, (4)
balanced geographical exposure, (5) a high proportion of revenues offshore and (6)
a steadily rising proportion of repeat business.
TCS likely to continue outperforming Sensex
YTD TCS has outperformed the Sensex by 7ppts. We expect this to continue and
believe the effect of recent macroeconomic events could bear on the IT services
spending decisions of financial services clients; however, it is unlikely to exert
significant downward pressure. We note that regulatory- and compliance-related IT
spending is likely to increase in CY12 in the US and overall spending is unlikely to
be drastically cut despite a recession. With a need to cut costs, Indian vendors
could potentially gain market share. We forecast a downside risk to our
expectations only in the event of another credit crisis.
Valuation and risks
Our target price is based on a PE of 25x FY12E/06. We believe our target PE is
well supported by 22% earnings CAGR in FY12-14E. A key risk is higher-thanexpected appreciation of the rupee vs. major billing currencies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Consultancy
Reuters: TCS.BO Bloomberg: TCS IN Exchange: BSE Ticker: TCS
Meeting takeaways: no signs of demand weakness
Demand continues to be strong with stable pricing
In our meeting yesterday, TCS' CFO confirmed that despite the deterioration in the
global macroeconomic environment, demand for IT services continues to be
strong and there have been no delays in clients’ decision making. The company
does not see any early signs indicating spending cuts by clients in CY12. However,
even if there were a recession, the company believes demand is unlikely to visit its
FY10 lows and TCS is better equipped to weather a recession. We continue to
rate TCS as our top pick; Buy recommendation and a target price of INR1,460.
Balanced portfolio of services and geographical exposure
TCS’ management noted that IT service spending has not reached the highs
witnessed in CY07. Therefore, in case of a recession, clients are unlikely to reduce
spending as drastically as in CY08-09 as there is very little flexibility on pricing.
Moreover, TCS is also likely to fare better than peers due to (1) balanced deal
wins, (2) a defensive portfolio of services, (3) reduced vertical concentration, (4)
balanced geographical exposure, (5) a high proportion of revenues offshore and (6)
a steadily rising proportion of repeat business.
TCS likely to continue outperforming Sensex
YTD TCS has outperformed the Sensex by 7ppts. We expect this to continue and
believe the effect of recent macroeconomic events could bear on the IT services
spending decisions of financial services clients; however, it is unlikely to exert
significant downward pressure. We note that regulatory- and compliance-related IT
spending is likely to increase in CY12 in the US and overall spending is unlikely to
be drastically cut despite a recession. With a need to cut costs, Indian vendors
could potentially gain market share. We forecast a downside risk to our
expectations only in the event of another credit crisis.
Valuation and risks
Our target price is based on a PE of 25x FY12E/06. We believe our target PE is
well supported by 22% earnings CAGR in FY12-14E. A key risk is higher-thanexpected appreciation of the rupee vs. major billing currencies.
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