For 4QFY2011, TCS reported modest set of numbers. However, growth outlook for FY2012 stood very promising with a target of 60,000 gross employee additions. TCS continues to remain our preferred pick in the IT pack. We maintain our Accumulate rating on the stock with a target price of `1,349.
Quarterly highlights: For 4QFY2011, TCS posted revenue of US$2,244mn, up 4.7% qoq, on the back of modest volume growth of 2.9% qoq, pricing uptick of 0.8% qoq, cross-currency benefit of 0.9% and higher onsite effort aiding a 0.1% increase in revenue. EBIT margin declined only by 6bp to 28.0%, despite strong gross addition of 19,324 employees, which primarily led to a 200bp drop in the utilisation level (including trainees) to 75.1% along with a seasonally weak quarter. PAT came in at `2,402cr with 3.1% qoq growth.
Outlook and valuation: Management highlighted that the demand environment is upbeat and it is chasing 20 large broad-based deals. Management undertook strong hiring in 4QFY2011 and gave robust hiring guidance of 60,000 gross additions for FY2012 and expects a like-to-like pricing increase in 2HFY2012. Even with such aggressive hiring plans, it targets to maintain utilisation levels excluding trainees at 82–84% in FY2012. Thus, over FY2011–13E, we expect the company’s revenue to post a 21.1% CAGR (INR) and a 23.3% CAGR (USD), surpassing the USD$10bn revenue mark in FY2012 itself. On the back of 1) strong growth expectations, 2) headroom to scale up utilisations including trainees to 76% and 77% in FY2012 and FY2013, respectively, and 3) SGA expense optimisation as a strong lever, we expect the company to swiftly counter the headwinds of aggressive wage hike of 12–14% offshore and 2–4% onsite as well as INR appreciation. We expect EBIT margin’s downside to be limited to 105bp (yoy) and settle at 26.8%. We value TCS at 22x (5% premium to Infosys) FY2013E EPS of `61.3, i.e., a target price of `1,349 and maintain an Accumulate view on the stock.
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