Retain HOLD on TCS - Op performance fails to enthuse - Emkay

- Dec'11 results tad misses est with rev at US$ 2.6 bn (+2.4% QoQ, +4.5% in c.c terms), Mgns up by ~190 bps QoQ(V/s est +240 bps). Inline profits aided by lower forex losses/ taxes

- Op metrics weak with vol growth at 3.2% ( Infy +3.1% QoQ). Top 5/10 clients flat sequentially while top client rev grow by ~2.3% QoQ. Headcount addition strong at ~12k during the qtr

- We cut our rev est.( model in 14.2%/16% YoY US$ growth V/s 16/17% earlier) driving a 3.4/4.2% cut in our FY13/14E earnings to Rs 63.2/71 (V/s Rs 65.4/74 earlier)

- Dec'11 qtr marks the 2nd qtr of op performance convergence with Infy. We see risks to TCS's premium valuation multiples. HOLD with TP cut to Rs 1,075 (V/s Rs 1,110 earlier)

Op performance fails to live to expectations

Dec'11 qtr marks the 2nd qtr wherein TCS has delivered in line /lower than peer Infy after the stupendous performance that has continued to surprise the street over several quarters in a row (note that TCS added similar incremental revenues as peer Infosys for the 1st time in 7 quarters). While revenues at US$ 2,586 mn (+2.4% QoQ, +4.5% QoQ in constant currency terms) missed modest expectations (3% QoQ US$ revenue growth) margins improved by ~190 bps sequentially buoyed by weak currency. Vol growth cooled to 3.2% QoQ after the scorching pace in recent quarters(V/s 3.1% for peer Infy) with Equipment and S/w license sales ( up 27% QoQ) aiding revenue growth. Profits at Rs 28.9 bn (+18.4% QoQ) met estimates aided by lower than estimated forex losses and lower taxes (22.6% V/s Emkay est of 24%). Headcount addition was decent at ~12k taking the total headcount to 226,751. Revenue performance was tepid across top clients with top 5/10 clients flat QoQ. Financial services revenue growth was the lowest since March'10 qtr, reflecting rampup challenges in some of the top financial services clients in our view.

Weak macro finally catches up with management commentary

TCS management has remained confident of the demand environment until now (despite cautious outlook by peer Infosys over recent history). However the weak macro environment has finally caught up the management commentary with co now indicating that (1) deal pipelines are intact however clients taking longer to take decisions, (2) delay in project starts impacting discretionary spending, and (3) getting price increases is difficult in the current environment (‘ we expect pricing to be stable in a narrow band') . Company indicated that it has given campus offers to ~43.5k graduates for FY13 and plans to make a gross hiring of ~15k during March'12 qtr.

Cut FY13/14E EPS by ~3.4/4.2%, HOLD, TP lowered to Rs 1,075

We cut rating on TCS to HOLD citing heightened investor expectations in August'11 and TCS's performance in both Sep'11 and Dec'11 qtrs has missed relatively modest expectations. We moderate revenue estimates (model in 14%/16% US$ revenue growth for FY13/14 V/s 16%/17% earlier) driving a 3.4%/4.2% cut in earnings to Rs 63.2/71. Dec'11 qtr marks the 2nd successive quarter of convergence in operating performance to Infosys after a streak of superior performance through several quarters and we see that trend continue. Retain HOLD with a revised TP of Rs 1,075 (V/s Rs 1,110 earlier)

Source : Equity Bulls

Keywords