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IT September 7, 2011
TCS
Bloomberg: TCS IN BUY
Reuters: TCS.BO
Analyst Contact
Naushil Shah
+91‐22‐22895034
Recommendation
CMP: Rs 1,031
Target Price: Rs 1,175
Upside : 14%
Stock Information
Market Cap. (Rsbn/US$mn) 2,018/43,874
52‐week High/Low (Rs) 1,247/830
Shares Outstanding (mn) 1,957
3m ADV Rs2,131mn /US$46.3mn
Beta 0.97
Sensex 16,863
Nifty 5,064
Stock Performance (%)
1M 3M 12M YTD
Absolute (2.5) (12.6) 18.3 (11.6)
Rel. to Sensex (1.2) (4.8) 26.8 5.2
Performance
Source: Capitaline, Karvy Institutional Research
8309301030113012301330
16,000
18,000
20,000
22,000
Aug‐10
Oct‐10
Dec‐10
Feb‐11
Apr‐11
Jun‐11
Sensex (LHS) TCS (RHS)
Factors in sluggishness, risk‐reward favorable Rising concern about IT demand. The US credit downgrade and weakness in
European markets have increased concerns about IT demand going forward.
IT stocks might remain under pressure in the near term. However, CNX IT is
down 28.4% (YTD in CY11), we believe, this safely factors in expected
pressure on earnings. However, Large Indian IT companies are continuously
increasing their wallet share among clients.
TCS, our top pick in the large Caps. TCS is the only large cap IT company
which has managed better‐than‐expected revenue growth and margin
increases, and we believe it would continue to do so. TCS remains positive
regarding pricing and management suggested pricing increase is likely to
take place in FY12, though in the near term we expect the pricing to remain
stable. We like TCS amongst the IT large‐caps, and in our view, offers a
favourable risk‐reward for long term investors and weakness should be seen
as an opportunity to accumulate.
BFSI spending drivers still intact. For global banks (TCS has ~44% of its
TTM revenues from BFSI), the pursuit of growth, cost pressures, migration
from legacy, standardization of platforms and regulatory requirements will
remain the drivers of IT spending. TCS is also gaining on account of vendor
consolidation.
Margin levers. (1) Broadening employee pyramid ‐ 37k campus offers made;
(2) nonlinearity‐ related initiatives – would provide margin cushion; (3)
improvement in initiatives like Diligenta; and (4) SG&A also has some limited
scope for improvement. For the first time, TCS EBIT margins surpassed that
of Infosys.
Valuation. TCS trades at valuations of 19.7x and 17.6x FY12e & FY13e EPS. EBITDA and PAT CAGR of 18.3% and 14.7% is expected over FY11‐13e. Our
TP of Rs1,175 is based on 20xFY13e earnings on account of robust return
ratios. While valuation is high, EBITDA growth should drive stock return, in
our view. Risk factors. Greater than expected slowdown in demand, pricing
pressures.
Key Financials
(Rs mn) FY09 FY10 FY11 FY12E FY13E
Net Sales 278,129 300,289 373,245 458,503 541,931
EBITDA 71,781 86,799 111,987 133,889 156,688
Net profit 51,721 68,725 87,167 102,455 114,622
EPS (Rs) 26.4 35.1 44.5 52.3 58.6
EPS Growth (%) 3.0 32.9 26.8 17.5 11.9
EBITDA margins (%) 25.8 28.9 30.0 29.2 28.9
PE (x) 39.1 29.4 23.2 19.7 17.6
EV/EBIDTA (x) 28.1 23.3 18.0 15.1 12.8
P/S (x) 7.3 6.7 5.4 4.4 3.7
RoCE (%) 41.4 42.4 45.0 44.8 42.7
RoE (%) 34.6 34.6 34.6 34.6 34.6
Source: Company & Karvy Institutional Research
INSTITUTIONAL EQUITIES
INDIA RESEARCH
Update
Institutional Equities Team Rangachari Murlikrishnan Head – Institutional Equities (022) 22895007 [email protected]
Shridhar Iyer Head ‐ Institutional Sales (022) 22895160 [email protected]
K. Anant Rao
Head ‐ Sales‐Trading &
Derivatives (022) 22895196 [email protected]
Uday Raval Karvy Inc. USA (212) 2674334 [email protected]
INSTITUTIONAL RESEARCH
Analysts Industry / Sector Desk Phone Email ID
Amit K. Ahire Telecom & Media 022‐22895150 [email protected]
Bhuvan Yadav MidCap 040‐23312454 [email protected]
Divyah Ahooja Auto & Auto Ancillaries 022‐22895143 [email protected]
Jagadishwar Pasunoori MidCap 040‐44857912 [email protected]
Madhavi Arora Economy 022‐22895145 [email protected]
Manoj Kumar Manish Derivatives Research 022‐22895078 [email protected]
Naushil Shah Technology 022‐22895034 [email protected]
Nishith Sanghvi Pharmaceuticals 022‐22895026 [email protected]
Paresh Jain BFSI 022‐22895025 [email protected]
Parikshit Kandpal Infra / Real Estate 022‐22895018 [email protected]
Prasun Kumar Cement & Logistics 022‐22895028 [email protected]
Raghuram Kuchi MidCap 040‐23312454 [email protected]
Rahul Sharma Pharmaceuticals 022‐22895021 [email protected]
Rahul Singh MidCap 040‐23312454 [email protected]
Rajesh Kumar Ravi Cement & Logistics 022‐22895030 [email protected]
Rupesh Sankhe Power 022‐22895022 [email protected]
Sameer Pardikar Telecom, Media and Oil & GAS 022‐22895024 [email protected]
Vinay Nair Oil & Gas 022‐22895029 [email protected]
Yogesh Nagaonkar Auto & Auto Ancillaries 022‐22895020 [email protected]
INSTITUTIONAL SALES
Dinesh Bajaj Sales 022‐22895012 [email protected]
Dipesh Jain Sales 022‐22895015 [email protected]
Jigna Haria Sales 022‐22895014 [email protected]
Priyanka Ahuja Sales 022‐22895016 [email protected]
R. Sriram Sales 022‐22895013 [email protected]
Shabbir Dahodwala Sales (USA) 212‐2674334 [email protected]
INSTITUTIONAL SALES DEALING
Dipesh Upadhyay Sales Trader 022‐22895060 [email protected]
Parag Shah Sales Trader 022‐22895066 [email protected]
Sriram Jagdish Sales Trader 022‐22895068 [email protected]
PRODUCTION
Asim Kumar Mohapatra Editor 022‐22895019 [email protected]
Vishal Randive Database 022‐22895017 [email protected]
Vijayalaxmi Moolya Production 022‐22895027 [email protected]
For further enquiries please contact:
Tel: +91‐22‐22895000
Disclosures Appendix
Analyst certification
The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately
reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or
will be directly or indirectly related to the specific recommendation(s) or views contained in this research report.
Disclaimer
The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein
is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness
thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments
discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions
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Stock Rating Absolute Returns
BUY : >15% HOLD : 5‐15% SELL : <5%
