Accumulate TCS; target of Rs 1275: Emkay

“Tata Consultancy Services (TCS), In line rev at USD 2,244 million (+4.6% QoQ) however solid QoQ flat margin show despite ~100 bps sequential onsite shift, strong net hiring at ~12k and ~200 bps drop in utilization. Continental Europe (+11.4% QoQ) , Manufacturing(+9% QoQ) post strong growth while BFSI(+3.3%QoQ) and Telecom (-3.3% QoQ) dragged revenue growth. Decent results from TCS should soothe investor concerns after a near disaster at peer Infosys. Company lends confidence to demand visibility with a strong hiring outlook. Tweak FY12/13E earnings marginally to Rs 51.3/61.7 (V/s Rs 51.3/61.5 earlier).”

“After a near disaster at peer Infosys, TCS’s in line March’11 quarter show should lend confidence to strong demand thesis for offshore Indian IT. While revenues came in exactly in line at USD 2,244 million (+4.7% QoQ), we appreciate TCS’s margin show (reported flat margins sequentially at 30.3%) despite (1) onsite shift (onsite % of revenues up by ~100 bps QoQ to 44.7%), (2) another quarter of strong net hiring (+11,700 in March’11, marking the 3rd successive quarter of strong hiring) and (3) ~200 bps QoQ decline in utilization to 75.1%. Co wide volume growth was ~2.9% QoQ with cross currency / pricing gains driving ~180 bps QoQ revenue increase. Profits at Rs 24 billion (+3.1% QoQ, +25% YoY) came in marginally higher than expectations driven by higher other income. While Manufacturing (+9% QoQ), Energy and Utilities (+9.4% QoQ), Healthcare (+6.7% QoQ) and retail (+7.5% QoQ) grew strongly, BFSI (+3.3% QoQ) and Telecom (-3.3% QoQ) were relatively soft. Amongst geographies, Continental Europe (+11.4% QoQ) and Asia Pac (+9.2% sequentially) reported strong performance.”

“TCS’s strong gross hiring targets of ~60k (co has already made campus offers of ~37k) on the back of an already strong hiring through FY11 in our view is an indication of strong demand visibility. Management indicated that it intends to give wage increments of 12-14% for offshore staff and 2-3% for onsite staff. Further the company indicated that demand was continuing to recover both in Europe (continental Europe grew by ~7% in constant currency with growth in UK expected to bounce going ahead) and in Telecom (however expects growth to be lower than co average in FY12 as was the case in FY11). TCS’s in line results and positive demand commentary in our view should soothe investor nerves after the near disaster at peer Infosys. TCS has continued to deliver better than Infosys both on revenue growth as well as margin show (improving margins despite strong hiring, currency appreciation) which should sustain TCS’s valuation premium to Infosys. Retain Accumulate with an unchanged target price of Rs 1,275,” says Emkay Global Financial Services research report.

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