TCS Ltd (Q4 FY12)

CMP Rs1,059, Target Rs1,175, Upside 11.0%

• Dollar revenues/volumes better than expected; Pricing corrects marginally
• Broad based growth across verticals & geographies; Non top-10 clients drive growth
• OPM performance marginally better despite utilization correction 
• Substantial employee additions and decent FY13 hiring guidance; Attrition reduces further
• All round decent performance, encouraging commentary instill confidence; Valuations attractive post recent price correction

Result table

Dollar revenues/volumes better than expected; Pricing corrects marginally

TCS reported a better than expected dollar revenues for Q4 FY12 which grew 2.4% qoq. Slower volumes as experienced by the company during January/February ramped up towards the end resulting in a 3.3% volume growth (robust for a traditionally weak Q4 as well as relative to the performance at Infosys). Realisation corrected marginally by 1% sequentially resulting in constant currency growth of 2.3% qoq. Company maintained commentary on stable pricing environment going forward. Company won six large deals during the quarter, broadly distributed across geographies and verticals.

Broad based growth across verticals & geographies; Non top-10 clients drive growth

The growth across various verticals and geographies was pleasantly broad based in Q4 FY12. Amongst verticals, Manufacturing, Retail and Hitech drove the growth posting ~4% dollar revenue growth qoq.  Verticals like Telecom, Media and HC posted growth in-line with company average (~2.4%). BFSI remained flat qoq (-0.2% sequentially), a relief when compared to the strong de-growth seen in peers. On a positive note, management expected BFSI, Telecom to have bottomed out. Within geographies, US grew 2.9% qoq, APAC and India grew 3.7%/3.6% qoq in dollar terms. Continental Europe de-grew 4.4% on the back of strong Q1-Q3 FY12 growth.  Among major services, ADM (+3.3% qoq), BPO (+9% qoq) and Engineering (+2.4% qoq) grew well. Within clients, top/top5/top10 were largely flat with non top10 growing 3.2% qoq in dollar terms.

OPM performance marginally better despite strong utilization correction

TCS' OPM performance for Q4 FY12 was marginally better than our expectation. Operating margin for the quarter corrected 150bps qoq to 29.5% (versus expectation of 172bps correction). Stronger than expected volumes, we believe, played a tailwind. This along with improving productivity (+36bps qoq) offset the headwinds of currency (-71bps) and higher SG&A (-120bps). Utilization (including trainees) also corrected materially by 240bps. Marginally better OPM, decent Other Income and lower ETR (21.6% versus 22.6% last quarter) lead to a better than expected PAT which came in at Rs2932mn (versus expectation of Rs2886mn). For FY13 company has implemented salary hikes of average 8% offshore and average 3% onsite, a move that would probably lead to similar move in the industry. Utilization as well as currency are expected to be key tailwinds to support OPM going ahead against the headwinds of salary hikes as well as continued SG&A investments, in our view.   

Substantial employee additions and decent FY13 hiring guidance; Attrition reduces further

The employee addition at TCS has been materially higher in FY12. In Q4 FY12, company added 19,156 employees on a gross basis and 11,832 employees (5.22% of Q3 FY12 base) on a net basis.  In H2 FY12, the company has added 11% of its Q2 FY12 base. In FY12, the company has added 70,400 on a gross basis, its highest ever in a year. Understandably its utilization has corrected from 75.1% (including trainees) four quarters back to 71.3% now. Company has already given offers to 43,600 freshers to join FY13 and has guided for a total 50,000 employee addition on a gross basis. Strong hiring done in FY12 as well as decent guidance for FY13, is a strong indicator of the visibility of revenues for the company going forward. Another positive on the result was the continued trending down of attrition which is now at 12.2% (versus 14.4% in Q4 Fy11).

All round decent performance, encouraging commentary instill confidence; Valuations attractive post recent price correction

TCS delivered another set of satisfying results allaying doubts of a worse than expected demand/spending environment. As opposed to Infosys, the TCS management’s commentary is pleasantly positive with comments on the demand environment looking relatively better than a quarter back. The stance on discretionary spending of clients too was materially positive with indicated pick ups in coming quarters. Also an expectation of a normal year (FY13) by the management (H1 growth stronger than H2) also indicates that near term demand environment is good (at least for the company). Management has also showed decent confidence of beating the industry growth expectation (11-14%) in FY13, a material positive in our view. We resultantly increase our FY13-14E revenue growth assumptions to reflect the same. Decent growth expectation as well as attractive valuations (stock corrected 10%+ in last one month and is now trading at 16x FY13E earnings) makes the stock a BUY.