TCS: Strong quarter; positive outlook allays macro fears - Avendus

Strong quarter; positive outlook allays macro fears

The 0.4% q-o-q revenue growth in INR terms was in line with our estimate and was led by a 3.3% volume growth and 1.1% realization gains; it was impacted by a 4% INR appreciation. The EBITDA margin declined 155-bps q-o-q, but higher forex income led to a stable net margin. Growth was broad-based across geographies and service lines. While revenues from BFSI were flat q-o-q, three large deals in this vertical during the quarter is likely to drive growth in the near term. The management is confident that TCS will grow faster than the industry in FY13 and margins will be maintained despite a 6–10% offshore wage hike; these factors are likely to allay fears of a weak business environment. We revise our FY13 and FY14 EPS estimates marginally lower to factor in the INR appreciation and continue to value the company at a P/E of 19.0x. After a rollover to Mar13, we arrive at a revised TP of INR 1,360 and maintain our Buy rating.

Another quarter of broad-based growth

Revenues from the Manufacturing and Hi-tech verticals rose 3.7% q-o-q each, while Telecom, Life Sciences and Media registered a 2% q-o-q growth each. BFSI's revenues were 0.6% lower q-o-q due to a delay in discretionary client spending at the beginning of the calendar year. However, this was far better than the 6%–8% sequential decline among peers. Three of six large deals in the quarter were from BFSI, which is likely to drive growth in this vertical in the coming quarters. The North American region registered a strong revenue growth of 2.6% q-o-q compared to a 4%–6% fall among peers. Revenues from the India and APAC regions also had a strong growth of over 3% q-o-q.

Record employee additions, wage hikes reflects optimism

TCS added 70,400 employees gross in Mar12, which was far higher than the 60,000 guided to in the beginning of FY12, and has further guided to a gross addition of 50,000 employees in FY13. The company has also given out wage hikes in the range of 6%–10% to offshore employees, and 2%–4% to onsite employees, contrary to a wage freeze by Infosys (INFO IN, ADD); this pointed to a relatively better demand outlook. A 140-bp fall in utilization during the quarter to 80.6% and favorable employee pyramid is likely to provide TCS with adequate operating leverage to absorb wage hikes in FY13, while maintaining margins.

Revise estimates after factoring INR movement; maintain Buy

We have revised our INR revenue estimates for FY13 and FY14 by c5.5%, based on the revised Bloomberg consensus estimate for the INR/USD, while leaving our USD revenue estimate unchanged. We continue to value the company at a P/E of 19.0x. After the rollover to Mar13, we arrive at a revised TP of INR 1,360, implying an upside of 28%. We maintain our Buy rating. Risk factors include a slowdown in BFSI spending and currency volatility.

Risk factors

- Slowdown in the BFSI sector
- Sharp fluctuations in the INR/USD rate in either direction
- Lower level of bench strength available in case of a sudden spurt in outsourcing demand.

Source : Equity Bulls

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