Tata Consultancy Services : BUY

Raising the Bar

TCS’ FY11 performance (Rev up ~24% YoY & PAT up ~26% YoY, despite INR appn) exemplifies its strategy of “growth with a margin focus”.  FY12E  to  mark  another  year  of  growth  with  23  units  being carved out that have strong leadership team, profitability focus and rev potential of USD 1 bn each over next few years (TCS’ FY11 topline: USD 8.2 bn). We are mainly enthused by its strong deal pipeline, mgmt confidence on growth, power focus on non-linear initiatives & execution capabilities to manage ~80-84% utz rates.

Q4FY11 marked a perfect finish with broad based growth (vols. in int’l. biz up 3.3% QoQ) despite Q4 seasonality and margin headwinds from higher onsite revs, lower utz rates and ~19,300 employee addns.

Key highlights: Q4FY11

• Sales:  Led by blended volumes (+2.9% QoQ), pricing (+0.8% QoQ in const currency), currency benefit (1.3% QoQ) & onsite shift (0.1% QoQ)
• EBITDA:  Despite decline in utz – currency benefit (58 bps), improved realizations & SG&A efficiency helped to maintain EBITDA % QoQ
• PAT: Higher other income helped offset higher tax Continued improvement in revenue visibility; margin confidence high: Our confidence in rev visibility is further strengthened by: 1) Robust 18% QoQ growth in Enterprise Solns (Q4 rev share at ~11%) – a key indicator of discretionary spend; 2) Strong deal pipeline (closed 7 large transformation deals in Q4 and currently pursuing 20 deals), & 3) Gross hiring target of 60K for FY12E (campus offers at ~37K).
• Positive commentary on pricing & utz (target to maintain utz ex-trainees in the range 80-84% range) is added positive from a margin standpoint. Addl. margin levers include: 1) volumes from verticals / geos like Telecom / Continental Europe that are showing signs of improvement; 2) better offshore rev %; 3) margin increase in GDCs/ EMs (5% rev share); & 4) better trajectory from non-linear offerings (e.g. its SMB platform, iON had 225+ clients in its first quarter of launch).

Valuations

Our FY12E EPS est. remains largely at ~Rs 53; with FY13E EPS est. at ~Rs 62. Our BUY rating with TP of Rs 1,330 at 25x FY12E EPS.