- An in-line revenue performance supported by higher realisation
- Broad based growth across verticals/geographies; Consulting, ERP and IMS services show robust growth
- OPM betters estimates driven by improved productivity; Employee addition remains robust
- Decent quarter with positive management commentary keep us enthused; Valuation restricts upside potential
|(Rs mn)||Q3 FY13||Q2 FY13||% qoq||Q3 FY12||% yoy|
|OPM (%)||29.0||28.4||53 bps||31.0||(203) bps|
|Effective tax rate (%)||21.8||21.0||-||22.6||-|
|Adj. PAT margin (%)||22.1||22.5||(38) bps||21.9||24 bps|
An in-line revenue performance supported by higher realisation
TCS Q3 FY13 revenue performance was largely as expected with dollar revenues growing 3.3% (v/s expectation of 3% qoq). The revenue growth was driven by realisation improvement (+130bps qoq in constant currency terms). The sequential volume growth of 1.3% came in below estimates impacted by lower working days, manufacturing, Hi-tech furloughs as well as one-off furloughs in BFSI vertical. Management commentary on demand environment continued to be robust especially on discretionary spends, deal closures and executable order book. Company announced seven large deals with BFSI and US geography contributing the most to the same.
Broad based growth across verticals/geographies; Consulting, ERP and IMS services show robust growth
While TCS’ Q3 FY13 performance drivers were largely broad-based across verticals/geographies they were more selective amongst service lines. Amongst the key verticals, growth was driven by BFSI (+3.8% qoq) and Manufacturing (+7.1% qoq). On the flip side, Telecom de-grew substantially by 4.7% qoq. Amongst the geographies, US/Europe grew in-line with company average (+3.3% qoq) and India grew 4.7% qoq (albeit on a lower base). Within services, discretionary services like consulting, ERP grew strongly at 10.2%, 4.7% qoq respectively contributing to nearly 30% of incremental revenues. Also, IMS continued its robust traction posting 6% qoq growth. Traditional services like ADM, BPO were a laggard both of which grew at a meager pace of 1.7% qoq. From clients’ perspective, non-top 10 continued to drive the performance growing 3.9% qoq. Client additions were stable with US$100mn+ clientele showing a smart up-tick (+2 qoq).
OPM betters estimates driven by improved productivity; Employee addition remains robust
Q3 FY13 OPM performance for TCS came in ahead our estimates expanding 50bps qoq to 29% versus our expectation of 30bps correction. Portfolio shift towards higher realisation services like consulting and enterprise solution helped the better-than-expected margin performance. More specifically, 50bps negative impact due to higher SG&A costs was more than offset by productivity improvement (+82bps) and higher offshoring (+16bps). The higher SG&A cost, we believe, was on the back of the strong fresher hiring of ~10000 employees during the quarter. Despite the forex loss of Rs734mn, the Q3 FY13 PAT grew 1.1% qoq on the back of strong revenue and OPM performance. Employee addition during the quarter was robust with gross additions of 17000+ employees and growth in net additions at 4% of Q2 FY13 base. Attrition continued its impressive downward trend with IT services attrition rate (LTM) coming in at 9.8% (versus 10.2% earlier). Company has guided towards addition of 10000+ employees in next quarter and has already given out campus offers to ~24000 freshers for FY14.
Decent quarter with positive management commentary keep us enthused; Valuations restrict upside potential; Maintain MP
Q3 FY13 was yet another quarter of satisfying all round performance for TCS. Its sustained strong performance especially in the troubled BFSI vertical, traction across verticals/geographies, robust employee hiring and tight execution continues to impress us. Sanguine management commentary on demand traction implies that the revenue momentum and relative out-performance vis-à-vis peers should continue. Resultantly, we expect TCS to maintain the valuation premium over its peer set. We mark-up our estimates to incorporate stronger margin performance during the quarter. Post introducing FY15 estimates we now expect TCS to witness 13%/11% dollar revenue/ Rupee PAT CAGR over FY13-15E. While our 9-month TP is extended to Rs1450, P/E valuation at 14.9x FY15E earnings does not provide material upside. Maintain MP.
|Y/e 31 Mar (Rs m)||FY12||FY13E||FY14E||FY15E|
|yoy growth (%)||31.0||29.4||13.2||11.3|
|yoy growth (%)||22.7||33.4||10.9||11.2|