TCS Ltd (Q3 CY12)

India Infoline News Service | Mumbai |

Strong quarter in a slow demand environment; Valuations restrict upside potential

CMP Rs1,290, Target Rs1,342, Upside 4.0%
  • Volume/dollar revenue growth marginally better than expected
  • Broad based growth across verticals/services; Non Top-10 clients continue to drive growth
  • Higher onsite effort pulls down OPM marginally; Employee additions strong
  • Strong quarter in a slow demand environment; Valuations restrict upside potential
Result table
(Rs mn) Q2 FY13 Q1 FY13 % qoq Q2 FY12 % yoy
Net sales 1,56,208 1,48,687 5.1 1,16,335 34.3
Operating profit 44,328 43,328 2.3 33,829 31.0
OPM (%) 28.4 29.1 (76) bps 29.1 (70) bps
Depreciation 2,540 2,431 4.5 2,286 11.1
Other income 3,103 1,754 76.9 997 211.2
PBT 44,891 42,651 5.3 32,540 38.0
Tax 9,443 9,457 (0.1) 7,913 19.3
Effective tax rate (%) 21.0 22.2 - 24.3 -
Other Prov./Minority 326 388 (16.0) 237 37.6
Adjusted PAT 35,123 32,806 7.1 24,390 44.0
Adj. PAT margin (%) 22.5 22.1 42bps 21.0 152 bps
Reported PAT 35,123 32,806 7.1 24,390 44.0
EPS (Rs) 17.9 16.8 7.1 12.5 44.0
Source: Company, India Infoline Research

Volume/dollar revenue growth marginally better than expected

TCS Q2 FY13 top line performance came in pleasantly ahead of our estimates. The company posted a constant currency (cc) dollar revenue growth of 4.8% qoq supported by volume growth of 5% qoq. On the back of cc pricing correction (-49bps) and higher onsite mix (+38bps), the reported dollar revenues registered 4.6% sequential growth (versus 4% expectation). Deal traction continued to be good with eleven deals won in Q2 FY13. Management commentary on demand environment continued to be strong with stable pricing, normal decision making cycles (no delays) and largely unaffected discretionary spend environment.  


Broad based growth across verticals/services; Non Top-10 clients continue to drive growth

Q2 FY13 performance was impressive with broad based growth across various verticals, services and geographies.  Top verticals of BFSI, Retail, Telecom and Manufacturing continued to grow well posting 4.1%/6.2%/4.6%/8.6% respectively on qoq basis. Within services, growth was driven by Infrastructure services (+12.5% qoq), Engineering (+4.6% qoq) and ADM (+3.9% qoq). Post the strong up-tick last quarter (due to Friends Life deal), BPO growth was more restrained at 1.4% qoq.  Growth was commendable across geographies, with US and UK&EU growing 3.5%/4.6% qoq respectively. Growth was especially strong in emerging geographies like Latin  America (+7.8% qoq), India (+10.5% qoq) and APAC (+7.4% qoq). From clients’ perspective, growth continued to be driven by non Top-10 clients which grew 5.9% qoq. 


Higher onsite effort pulls down OPM marginally below estimate; Employee additions strong

Q2 FY13 operating margin for TCS came in at 28.4%, ~70bps lower than our expectation. The margin performance was negatively affected by an higher onsite mix (onsite revenues up 7.5% qoq) - 50bps impact, lower productivity (22bps impact) and currency impact (12 bps). The lower margin was largely compensated by higher than expected forex gain (Rs922mn versus Rs100mn estimate) and lower tax rate (21% versus 22.2% last quarter) resulted in an in-line PAT of Rs35.1bn. Employee additions continued to be strong with Q2 FY13 net additions at 4.3% of Q1 base.  Attrition rate further declined to 10.2% - lowest in last four years. Hiring guidance of 25000 freshers for FY14 also implies the robust medium term demand for TCS.


Strong quarter in a slow demand environment; Valuations restrict upside potential

TCS once again delivered a well rounded performance with better than expected volumes.  Sustained strong performance vindicates its well entrenched technological expertise, improving global traction, full services model, strong client mining and impeccable delivery. Management commentary remained positive in terms of deal pipeline, pricing environment, decision making cycles and client discretionary spending. We continue to be positive on TCS and expect it to post ~14%/19% dollar revenue/rupee earnings CAGR over FY12-14E. On the other hand, P/E Valuation of 17x FY14E earnings restrict stock price upside. Retain 9-month TP (Rs1342) as well as MP rating.   

   
Financial Summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 373,245 488,938 625,282 701,218
yoy growth (%) 24.3 31.0 27.9 12.1
Operating profit 112,093 144,205 178,280 197,076
OPM (%) 30.0 29.5 28.5 28.1
Reported PAT 86,800 106,514 138,484 149,611
yoy growth (%) 26.3 22.7 30.0 8.0
         
EPS (Rs) 44.3 54.4 70.8 76.4
P/E (x) 29.1 23.7 18.2 16.9
Price/Book (x) 10.3 7.8 5.9 4.6
EV/EBITDA (x) 21.9 16.6 13.0 11.2
RoE (%) 38.4 37.6 37.0 31.6
RoCE (%) 46.9 46.4 45.8 39.9
Source: Company, India Infoline Research



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