Tuesday, April 24, 2012

>TATA CONSULTANCY SERVICES: Guides for Gross additions of 50000 employees for FY13E

TCS results offered respite to the IT sector with topline marginally above street estimates and EBIDTA margins inline with street expectations. TCS offered positive commentary on the business environment citing uptick in discretionary spending at clients as well as new deal signings which has enabled strong order pipeline for the company. This was in sharp contrast to its earlier commentary during Q3FY12 in which it hinted of slower discretionary project starts and slower decision making cycles. Despite tapering Utilization rates and moderate hiring guidance for FY13E , TCS guided for wage hikes across the board and hinted at 8% wage hikes in India which could put nearest peer Infosys in a fix ( Infosys has not provided any wage
hikes to its employees post Q4FY12 fiasco) . BFSI vertical revenues were also flat on a sequential basis and TCS hinted at growth outlook in the BFSI vertical over the coming period driven by new deal wins. Barring rupee depreciation drive EPS upgrades we see few positive triggers for the stock in the near term and growth outlook is fairly priced in the valuations. We value TCS at a P/E of 16x on FY14E EPS of Rs70.4/share which yields target price of `1126/Share.

  Reiterate Underperformer.
Revenues above expectations, EBIDTA Margins inline with street estimates TCS reported Q4FY12 revenues of USD2648mn up 2.4% on a QoQ basis ahead of our estimates (our estimate was USD2630mn). Volumes growth at 3.3% on a QoQ basis was ahead of peers Infosys which has reported a sequential drop in volumes. Revenues in INR terms came at `132.5bn up 0.4% QoQ and 30.5% on a YoY basis. Volume growth of 3.26%, Constant currency pricing was down 0.97%, currency impact was negative by 1.87% bps leading to rupee term revenue growth of 0.4% on a QoQ basis. EBIDTA margin came at 29.6% down
140bps QoQ predominantly driven by rupee appreciation and strong hiring by the company. PAT at `28.9 bn was marginally above our estimate due to beat in revenues and lower tax rates.

  BFSI flat on a sequential basis, North America grows sequentially
North America, UK and APAC showed strength on sequential basis while Continental Europe declined QoQ. Retail, Manufacturing, Hitech verticals were growth drivers for the quarter while BFSI was flat on a sequential basis. BPO, ADM and asset managed services outperformed on the service line front while discretionary service lines like Business intelligence and Enterprise solution declined QoQ.

  Guides for Gross additions of 50000 employees for FY13E
TCS guided for gross hiring of 50000 employees for FY13E (Of which 43000 are campus offers) and hinted at staggered intake during the year based on demand offtake. Utilization rates (excluding trainees) came at 80.6% down 140 bps on a sequential basis due to slower volume growth. Revenues from Top 10 clients grew by 0.2% QoQ while client mining improved across bands which hints at strong cross capabilities.