For 1QFY2012, TCS reported strong set of numbers, outperforming our as well as street expectations. The major highlight of the result was the 7.4% qoq volume growth. Management has highlighted robust growth outlook for FY2012, with the deal pipeline being strong and discretionary spend coming in. TCS continues to remain our preferred pick along with HCL Tech in the IT pack. We maintain our Buy rating on the stock.
Quarterly highlights: For 1QFY2012, TCS posted revenue of US$2,412mn, up 7.5% qoq, majorly led by volume growth. This is second best quarter where the company reported qoq incremental revenue of US$168mn (after US$210mn in 2QFY2011). In rupee terms, revenue came in at `10,797cr, up 6.3% qoq. EBITDA and EBIT margin of the company declined by 233bp and 214bp qoq, respectively, due to wage hikes given in 1QFY2012, effective from April 1, 2011. PAT came in at `2,380cr, almost flat qoq despite margin headwinds on the back of higher other income due to forex gain of `79cr on hedges resulting in total income yield of `289cr as against `224cr in 4QFY2011.
Outlook and valuation: Management has highlighted that the demand environment is upbeat and it is chasing 15 large broad-based deals. Management maintained its robust hiring guidance of 60,000 gross additions for FY2012 and expects a like-to-like pricing increase in the far end of FY2012. Even with such aggressive hiring plans, management targets to maintain the utilisation levels excluding trainees at 82–84% in FY2012. Thus, over FY2011–13E, we expect the company’s revenue to post a 21.7% CAGR (INR terms) and a 24% CAGR (USD terms), surpassing the US$10bn revenue mark in FY2012 itself. On the back of 1) strong growth expectations, 2) headroom to scale up utilisations including trainees to 77% by FY2013 and 3) SGA expense optimisation as a strong lever, we expect the company to swiftly counter the headwinds of aggressive wage hike. We expect EBIT margin’s downside to be limited to 108bp yoy and settle at 27% by FY2013. We value TCS at 22x (10% premium to Infosys) FY2013E EPS of `62.2 with a target price of `1,368 and maintain our Buy rating on the stock
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