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TCS (TCS)
Technology
Slowdown, cyclicality or a mix of both? Even as TCS’ 3QFY12 headline numbers
were in line, weak commentary on 4QFY12 would raise concerns on strength of
demand environment and Street’s growth forecast for FY2013E. We view TCS’
comments as an indicator of moderate slowdown but refrain from extrapolating
comments on a seasonally weak quarter as the base for FY2013E forecast. We discuss
these issues in detail. We cut revenue growth and EPS estimates by 0.5-1.7% for
FY2012-14E. Cut target price to Rs1,250/share (Rs1,300 earlier). Retain BUY.
Headline numbers in line with our estimate but weak on composition
TCS reported revenues of US$2.58 bn, a qoq growth of 2.4% and consistent with our estimate.
Volume growth slowed to 3.2%. Reported growth was helped by ~US$20 mn incremental
revenues from software and equipment sales out of US$61 mn of incremental revenues. EBITDA
margin increased 190 bps qoq to 31%, led entirely by Rupee depreciation. Net income of Rs28.9
bn grew 18% qoq and included forex loss of Rs3 bn for the quarter.
Weak commentary but should that be extrapolated for FY2013E?
TCS management made two important comments on demand viz (1) 1/3rd of 96 clients within
top-120 have budgeted for spending cuts and (2) discretionary projects are undergoing greater
scrutiny causing delays in award of projects. Point #1 may not eventually decide growth outcome
from underpenetrated clients though point # 2 may hurt near-term revenue growth and is usually
indicative of increased uncertainty and volatility in performance.
We do acknowledge, as highlighted in our Infosys note that spending among highly penetrated US
financial services clients may decline. Still we believe there are several factors which will aid growth
including (1) strong lateral hiring suggesting good activity levels, (2) new client/deal deal wins; TCS
announced a few large deals, (3) market share gains in Europe and reasonable macro indicators in
US. We would refrain from extrapolating likely cyclically weak 4QFY12 as the base for our
FY2013E revenue forecast; cyclicality gets pronounced once certain clients reach a phase of
maturity. Points highlighted above will help. We model 14% revenue growth for FY2013E.
Maintain BUY rating with a target price of Rs1,250/share
TCS stock may decline after weak commentary and quality of growth. However, we see
reasonable upside despite moderation in our revenue growth forecast. We revise our EPS estimates
for FY2012-14E down by 1-2% on the back of modest revenue growth estimate cuts. We
continue to value TCS at the mid-range of mid-cycle multiple and cut our target price to
Rs1,250/share. BUY rating and conviction stay unchanged.
Lateral hiring is an important indicator for growth
TCS hired ~19,000 people (gross) in the quarter and 70,000+ over the past 12-months.
Lateral hiring was strong at 8,500+ employees in 3QFY12. Lateral hiring is an important
indicator for activity levels and company’s expectations of deal closures. Freeze in lateral
hiring is typically driven by freeze in decision making, limited visibility on IT budgets or high
visibility on project cancellations. None of these factors exist today. In fact, in addition to
strong lateral hires, aggressive 43,600 campus offers for FY2013 (flat yoy) also indicate
management‘s expectation of robust growth
Company can do better on free cash generation
TCS’ free cash generation has disappointed us over the past few quarters. OCF for 9MFY12
is down 4% yoy versus 9MFY11, despite a 30% growth in EBITDA over the same timeframe.
Simple FCF (OCF – capex) over the timeframe is down 14% yoy. FCF/EBITDA conversion for
9MFY12 stands at just 33% for 9MFY12 versus a much more normal 50% for 9MFY11. TCS
has attributed lower FCF generation in FY2012 YTD to increased working capital
investments.
Other results highlights
Gross headcount addition for the quarter was 18,907. Net headcount addition was
11,981. Close to 40% of gross recruitment in India for the quarter were laterals. The
company absorbed around 10,300 freshers.
TCS has guided for a gross hiring target of 15,000 for 4QFY12. This excludes the 1,500
net headcount addition on account of the Friends Life employee rebadging.
TCS has made 43,600 campus offers for FY2013E. The company indicated that it has
closed its campus hiring program for the year.
Attrition on an LTM basis declined to 11.7%.
The company ended the quarter with hedges of US$2.8 bn and had OCI MTM forex
losses of Rs8.9 bn on the balance sheet.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS (TCS)
Technology
Slowdown, cyclicality or a mix of both? Even as TCS’ 3QFY12 headline numbers
were in line, weak commentary on 4QFY12 would raise concerns on strength of
demand environment and Street’s growth forecast for FY2013E. We view TCS’
comments as an indicator of moderate slowdown but refrain from extrapolating
comments on a seasonally weak quarter as the base for FY2013E forecast. We discuss
these issues in detail. We cut revenue growth and EPS estimates by 0.5-1.7% for
FY2012-14E. Cut target price to Rs1,250/share (Rs1,300 earlier). Retain BUY.
Headline numbers in line with our estimate but weak on composition
TCS reported revenues of US$2.58 bn, a qoq growth of 2.4% and consistent with our estimate.
Volume growth slowed to 3.2%. Reported growth was helped by ~US$20 mn incremental
revenues from software and equipment sales out of US$61 mn of incremental revenues. EBITDA
margin increased 190 bps qoq to 31%, led entirely by Rupee depreciation. Net income of Rs28.9
bn grew 18% qoq and included forex loss of Rs3 bn for the quarter.
Weak commentary but should that be extrapolated for FY2013E?
TCS management made two important comments on demand viz (1) 1/3rd of 96 clients within
top-120 have budgeted for spending cuts and (2) discretionary projects are undergoing greater
scrutiny causing delays in award of projects. Point #1 may not eventually decide growth outcome
from underpenetrated clients though point # 2 may hurt near-term revenue growth and is usually
indicative of increased uncertainty and volatility in performance.
We do acknowledge, as highlighted in our Infosys note that spending among highly penetrated US
financial services clients may decline. Still we believe there are several factors which will aid growth
including (1) strong lateral hiring suggesting good activity levels, (2) new client/deal deal wins; TCS
announced a few large deals, (3) market share gains in Europe and reasonable macro indicators in
US. We would refrain from extrapolating likely cyclically weak 4QFY12 as the base for our
FY2013E revenue forecast; cyclicality gets pronounced once certain clients reach a phase of
maturity. Points highlighted above will help. We model 14% revenue growth for FY2013E.
Maintain BUY rating with a target price of Rs1,250/share
TCS stock may decline after weak commentary and quality of growth. However, we see
reasonable upside despite moderation in our revenue growth forecast. We revise our EPS estimates
for FY2012-14E down by 1-2% on the back of modest revenue growth estimate cuts. We
continue to value TCS at the mid-range of mid-cycle multiple and cut our target price to
Rs1,250/share. BUY rating and conviction stay unchanged.
Lateral hiring is an important indicator for growth
TCS hired ~19,000 people (gross) in the quarter and 70,000+ over the past 12-months.
Lateral hiring was strong at 8,500+ employees in 3QFY12. Lateral hiring is an important
indicator for activity levels and company’s expectations of deal closures. Freeze in lateral
hiring is typically driven by freeze in decision making, limited visibility on IT budgets or high
visibility on project cancellations. None of these factors exist today. In fact, in addition to
strong lateral hires, aggressive 43,600 campus offers for FY2013 (flat yoy) also indicate
management‘s expectation of robust growth
Company can do better on free cash generation
TCS’ free cash generation has disappointed us over the past few quarters. OCF for 9MFY12
is down 4% yoy versus 9MFY11, despite a 30% growth in EBITDA over the same timeframe.
Simple FCF (OCF – capex) over the timeframe is down 14% yoy. FCF/EBITDA conversion for
9MFY12 stands at just 33% for 9MFY12 versus a much more normal 50% for 9MFY11. TCS
has attributed lower FCF generation in FY2012 YTD to increased working capital
investments.
Other results highlights
Gross headcount addition for the quarter was 18,907. Net headcount addition was
11,981. Close to 40% of gross recruitment in India for the quarter were laterals. The
company absorbed around 10,300 freshers.
TCS has guided for a gross hiring target of 15,000 for 4QFY12. This excludes the 1,500
net headcount addition on account of the Friends Life employee rebadging.
TCS has made 43,600 campus offers for FY2013E. The company indicated that it has
closed its campus hiring program for the year.
Attrition on an LTM basis declined to 11.7%.
The company ended the quarter with hedges of US$2.8 bn and had OCI MTM forex
losses of Rs8.9 bn on the balance sheet.
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