Way2wealth_TCS_Management Meeting13th March 2013

7/30/2019 Way2wealth_TCS_Management Meeting13th March 2013

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India Research

Sector: Information Technology

Tata Consultancy Services Ltd.

We recently met the management of TCS to understand the current demand

scenario in the Indian IT industry and strategy of TCS to remain at leadership

position by maintaining industry leading growth and margin performance. Based

on our overall discussion, we believe, TCS would continue to grow better than

its peers backed by its strong execution capability and ramp up of earlier deal

winnings. At the current price of`1560, the stock is trading at 20x of FY14E

EPS of`78.15 and we are reiterating our HOLD recommendation on the stock.

Traditional IT Services Still Has Steam Left

Despite immense growth over the last 15 years, Indian IT services industry still

covers a very small part of the overall global IT services spending. Even if we

consider the fact that incremental offshoring reduces the overall IT budget; still

we have companies (even in BFSI space) in USA who are under penetrated in

terms of offshoring. Although, the portion of IT services that can be offshored

is a matter of debate, but, Indian IT companies have been entering into various

new service lines over the past few years where incremental outsourcing and

offshoring can be an opportunity. Further, these companies have been targeting

newer industry segments over the past few yearswhile financial services and

insurance were the initial sectors that these companies penetrated, they have

been focusing on verticals such as manufacturing, retail, healthcare, and energy &

utility of late.

Europe May Offer Huge Growth Opportunity

Indian IT companies have been able to grow reasonably fast in the Europe region

over the past, mainly focused towards United Kingdom market. Very recently,

companies are able to penetrate and grow the continental Europe market andNORDIC region due to their lower penetration and relatively low prevalence of

offshoring adopted by European companies. Although, the macroeconomic

environment in Europe is still shaky, we believe, Europe may offer huge growth

opportunity towards the Indian IT services companies.

Pent Up Demand in Discretionary Spending May Come in CY14

CY12 was a dreadful year for IT services industry, especially in the discretionary

spending area and companies in the developed market are postponing the

incremental spending due to overall instability into the system. But, with some

sign of development in the macroeconomic front, clients have started spending

to bring overall efficiency into the system. We believe, although CY13 IT budget

will be flat to marginally positive, spending would be more tilted towards CTB

spending and that would give boost to the discretionary decision dependent

service lines.

TCS Management Maintains Bullish Stance

TCS management indicated that FY14 would be a better year for TCS as well as

Indian IT as the company has better clarity on the clients spending intention;

decision delays are getting over and annuity deals are coming back to the

market. Big data, Digital Spending, Analytics are also picking up momentum.

Europe (especially Continental Europe) is expected to perform better in the

coming years, as clients are more moving towards the offshoring model to

curtail the cost. Management also indicated early signs of improvement indiscretionary spend as companies worldwide are targeting more efficiency to get

better growth and higher margin.

Management Meeting Update

Date 13th March, 2013

CMP `1560.00

Target Price N.A.

52 week High / Low `1598.00 / 1046.55

Equity `195.72cr

Face Value `1.00

Mkt. Capitalization `3,05,300cr

Avg. Daily Vol. (12 M) 1,55,000

BSE SENSEX 19564.92

NSE NIFTY 5914.10

NSE Code TCS

Bloomberg Code TCS IN

BSE Code 532540

Shareholding Pattern @ 31-12-12

Promoters 73.96%

DI/MFs 6.45%

Foreign Institutions 14.96%

Public & Others 4.63%

( cr)

Y/E MarFY11

A

FY12

A

FY13

E

FY14

E

Net Sales

($ Mn)8186 10171 11598 13233

Net Sales 37325 48894 63304 71456

Op. Profit 11177 14435 18287 20502

PAT 9067 10413 13873 15296

EPS 46 53 71 78

Op. Margin 30% 30% 29% 29%

PAT Margin 24% 21% 22% 21%

*E Estimated, A Audited

Debashish Mazumdar

Tel: +9122-66638952

[email protected]

Hold


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TCS Ltd. Management Meeting Update 2 13th March 2013

Strong Deal Pipeline Across Sectors

TCS won 7 large deals during Q3FY13 and among them 2 are in BFSI and1 each

in Telecom, Transportation, Retail, Healthcare and Government. Again, among

the 7 large deals company won 4 deals in USA. Management also articulated

strong confidence on the overall deal pipeline in the near future. Again, the

ramp up of the recently won deals would aid growth in the coming quarters.We believe, TCS has very strong order book position and that give enough

visibility and assurance about the near to medium term growth prospect.

Baking & Financial Services- Still Have Low Hanging Fruits To Grab

Banking and Financial Services is expected to continue to be the largest IT

services spender in the near future as their dependence on IT spending would

continue to be high and they would be the primary adopter of the new

technology. There are banks and financial services institutions in the global

levels who have opportunity to increase offshoring and outsourcing spending in

the near future. While, BFS space in Europe, which has a large size of around

$90bn is incrementally opening up for outsourcing.

Insurance Sector Growing Rapidly; Diligenta Has Good Potential

Insurance sector, which contributes 12% - 13% of total revenue of TCS is

growing rapidly mainly backed by replacement of the old systems that

companies are holding in this space. According to management, Diligenta still

has good untapped potential in the UK market. Around the total 75mn closed

insurance books, 25mn closed books are catered by different players and 8mn is

under TCS. Diligenta has good potential tapping incremental market share in

the closed book space due to its unique platform sharing low cost model.

Strong Hiring Indicates Near Term demand Scenario

TCS hired around 50000 people in the first 9 months of FY13 including 24000

fresher and the company would be completing the full year fresher hiring target

without any deferment. Even for FY14, management targeted 25000 campus

hiring and already given 24000 offers which shows managements immense

confidence on the medium term growth prospect.

Growth To Continue; Margin To Remain Stable

TCS is expected to maintain its industry leading growth in near to medium term

backed by its strong order pipeline and recent big deal wins. Based on the

recent pick up in the large deal market and continuous growth momentum

maintained by TCS, we are revising our FY14E revenue expectation upward to$13233mn, which implies 14% growth YoY. Overall operating margin is

expected to remain stable and EPS estimates revised upward to `78.15 to

accommodate, higher USD-INR and lower taxation.

Recommending HOLD

We believe, TCS would continue to grow better than its peers backed

by its strong execution capability and ramp up of earlier deal winnings.

But, at the current price of```1540, the stock is trading at 20x of FY14E

EPS of```78.15 and there is little room available for upside. At the

current price we are reiterating our HOLD recommendation on the

stock.


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Financial Projections

( Cr)

Income Statement FY10 FY11 FY12 FY13E FY14E

Revenues ($ MN) 6339 8186 10171 11598 13233

Revenues 30029 37325 48894 63304 71456

Software Development Cost 10880 13726 18572 24183 27373

Gross Profit 19149 23598 30322 39121 44082

S,G&A Expenses

S, G & A Expenses 10455 12421 15887 20834 23580

Total S,G&A Expenses 10455 12421 15887 20834 23580

EBITDA 8695 11177 14435 18287 20502

Depreciation & Amortization 661 735 918 1070 1075

PBIT 8034 10442 13517 17217 19427

Interest (Incl. Forex Gain & Loss) 207 63 448 38 30

Other Income 463 640 854 986 726

PBT 8290 11020 13923 18165 20123

Tax 1197 1831 3400 4127 4628

PAT Before Minority 7093 9189 10523 14038 15495

Less: Minority Interest 92 122 110 165 199

PAT Before Extraordinary 7001 9067 10413 13873 15296

PAT After Extraordinary 7001 9067 10413 13873 15296

EPS (```)))) 35.77 46.33 53.21 70.85 78.15

Operating Margin 28.95% 29.95% 29.52% 28.89% 28.69%

PAT Margin 23.31% 24.29% 21.30% 21.91% 21.41%

( Cr)

Balance Sheet FY10 FY11 FY12E FY13E FY14E

Share Capital 296 296 296 296 296Reserve & Surplus 18171 24209 29284 37862 51795

Minority Interest 362 458 559 458 458

Less: Misc Exp Written Off 3216 3232 3543 3232 3232

Total Networth 15612 21731 26595 35384 49317

Secured Borrowings 31 38 116 116 116

Unsecured Borrowings 72 36 0 0 0

Total Borrowings 103 75 116 116 116

Deferred Tax Liability (Net) -99 -51 -83 0 0

Total Liabilities 15617 21755 26628 35500 49433

Gross Block 6420 7792 9448 10848 10848

Less: Accumulated Depreciation 2897 3545 4329 5342 6417

Net Block 3522 4247 5119 5506 4431Add: Capital WIP 1017 1469 1446 1446 1446

Total Fixed Assets 4539 5716 6565 6952 5877

Marketable Investments 3682 1764 1352 3352 3352

Non Marketable Investments 0 0 0 0 1

Total Investments 3682 1764 1352 3352 3353

Inventories 18 23 18 18 18

Sundry Debtors 5855 8199 11520 13770 13770

Cash & Bank Balance 4719 7378 6003 9495 24503

Other Current Assets 26 74 458 7273 7273

Loans & Advances 3970 4858 2255 3255 3255

Total Current Assets, Loans & Advances 14588 20532 20255 33811 48819

Less: Current Liabilities 8295 7554 10884 11484 11484

Net Current Assets 6293 12978 9370 22327 37335

Total Assets 15617 21755 26628 35500 49433


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Team

Analyst Designation Sector Email Telephone

Nilesh Doshi President (Research) [email protected] +9122-6633 8950

Abhilasha Satale Senior Manager Metals & Mining, Textiles [email protected] +9122-6663 8953

Debashish Mazumdar Sr. Research Analyst Information Technology, Media debashish.mazumdar@tssl. in +9122-6663 8952

Shivani Mehra Sr. Research Analyst Auto, FMCG [email protected] +9122-6663 8956

Jigisha Jaini Sr. Research Analyst Capital Goods, Engineering [email protected] +9122-6146 2957

Nisha Harchekar Sr. Research Analyst Chemicals [email protected] +9122-6146 2952

Ashwini Manwatkar Research Associate Auto, FMCG [email protected] +9122-6146 2949

Institutional Sales Designation Email Telephone

Shilpa Venugopal Senior Manager [email protected] +9122-6164 2969

Anjali Dave Sales Associate [email protected] +9122-6663 8954

Institutional Dealing Designation Email Telephone

Ajay Prabhudesai Assistant Vice President [email protected] +9122-4027 8930

Vipul Mehta Manager [email protected] +9122-4027 8931

Gaurav Shah Manager [email protected] +9122-4027 8933

Mitul Doshi Senior Executive [email protected] +9122-4027 8932

Corporate Office:

3rd Floor, Hincon House, Tower - B, 247 Park, L.B.S. Marg, Vikhroli (W), Mumbai, Maharashtra 400083, India.

Tel No. 91-22 6663 8900 Email: [email protected]: www.technoworld.in,

www.way2wealth.com

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Way2wealth_TCS_Management Meeting13th March 2013