Sunday, December 19, 2010


Tata Consultancy Services (TCS) could not have delivered a better quarter than this one, every time superseding the earlier threshold. Q2FY11 has been an almost perfect quarter with no blemishes. “Profitable growth” has been the key theme that TCS delivers from this strong set of numbers, coming on top of an already strong Q1FY11. The company has done well on many parameters--handsome revenue and margin performance, volume growth of 11% QoQ, eight large deal wins spread across sectors, highest ever organic gross/net employee addition of 19,293/10,717, sequential growth of 10% plus across verticals & most clients, and most importantly, Ebitda (earnings before interest, taxes,depreciation and amortisation) margin improvement by 70 bps to 30% (historic high).
We see upgrade in consensus EPS (earnings per share) numbers for TCS, despite the appreciating rupee. We are revising up our EPS by 4% for FY11 and 6% for FY12 to Rs 42.6 and Rs 48.4, respectively. Also, the CEO remarked about the likely increase in IT budgets for the next fiscal based on preliminary discussions with a small set of clients. “Growth agenda” and “being efficient” are key themes driving the IT spending at client organisations in the current environment.

We see that the most impressive part of TCS’ performance over the past 4-6 quarters is its ability to rigourously close the margin gap with Infosys. TCS’ Ebit (earnings before interest and taxes) margin has expanded over 300 bps (basis points) since the start of the last fiscal. At the same time, we see advantages such as market diversity (horizontals), geographic diversity, end-to-end service offerings, and ability to bag large, bundled deals among others playing in harmony currently.

At CMP (current market price) of Rs 986, the stock is trading at a P/E (price-to-earnings) of 23.2x and 20.4x for FY11e and FY12e earnings, respectively. With consistent outperformance on revenues (QoQ) and strong margins, we see TCS’ valuations improving further and possibly entering the premium zone to that of Infosys. We maintain Buy on the stock and rate it ‘Sector Outperformer’ on relative returns.

TCS' revenues, at Rs 92.9 bn, jumped 13.0% QoQ and 25% YoY. In dollar terms, revenues grew 11.7% to $2,004 m. In constant currency terms, the company delivered 11% sequential growth. Gross profit for the quarter stood at Rs 43.4 bn, up 13.7% QoQ. Gross margin was flat at 46.8%. The company’s operating margin (Ebit) increased further by 86 bps QoQ and now stands at 28.0% TCS reported net income of Rs 21.1 bn, up 14.2% QoQ. Net profit margin now stands at 22.7% versus 22.4% in the previous quarter.

The company won eight large deals during the current quarter in addition to ten in the previous quarter, compared to nine deals by Infosys in H1.

India led the growth with 25.7% sequential growth in dollar terms. Continental Europe too saw a turnaround with 14.2% QoQ growth after lacklustre performance for the past two quarters.

All the verticals have reported a double-digit sequential growth. This is the second consecutive quarter where all the verticals have reported QoQ growth. Note that even manufacturing has shown a strong growth of 11.7% QoQ in dollar terms.

Growth momentum across horizontals continued with all showing sequential growth. Four verticals, namely business intelligence, enterprise solutions, assurance services and infrastructure services, reported more than 15% QoQ growth. TCS added 30 new clients (36 in Q1) during the quarter versus 27 for Infosys. The active clients count stood at 936 versus 930 in the previous quarter.

The number of $1 m clients increased by 11 to 420; there was an increase in the $5 m (1), $10 m (9), $20 m (1), $50 m (1) and $100 m (1) client bracket, over the previous quarter.



The scrip is finding good support around 950 levels and is likey to face resistance around 1200 levels. Buy on declines and hold for long term

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