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ACCUMULATE
Performance highlights
CMP
Target Price
(` cr)
Net revenue
EBITDA
EBITDA margin (%)
PAT
3QFY14
21,294
6,687
31.4
5,314
2QFY14
20,977
6,639
31.6
4,702
% chg (qoq)
1.5
0.7
(25)bp
13.0
3QFY13
16,070
4,654
29.0
3,552
% chg (yoy)
32.5
43.7
244bp
49.6
TCS, in its 3QFY2014 results, reported revenues and operating margin a tad
lower than expectations while net profit stood higher than estimates on account of
healthy forex gains. The companys performance was impacted due to ~6%
sequential decline in Indian business revenues; international business revenues
grew modestly by 3.8% qoq in USD terms. The companys overall volume growth
came in at 1.8% qoq, which is a bit disappointing; however, excluding India
business, volume growth was healthy at 2.9% qoq. The Managements bullish
commentary, coupled with continued hiring and pick up in discretionary spends
point that TCS will continue to be an outperformer in the sector. We maintain our
Accumulate rating on the stock.
Quarterly highlights: For 3QFY2014, TCS posted a revenue of US$3,338mn, up
3% qoq. In INR terms, the revenue came in at `21,294cr, up 1.5% qoq. The EBIT
margin of the company declined by 42bp qoq to 29.7% as the company
increased its S&M investments. Net profit grew substantially by 13% qoq to
`5,314cr, supported by a forex gain of `299cr as against a loss of `377cr in
2QFY2014.
Outlook and valuation: The Management reiterated that it expects FY2015 to be
better than FY2014 on the back of strong pipeline and budget indications from
clients. A healthy pipeline, broad-based deal signings, initial signs of up-turn in
discretionary spending and good traction in annuity, traditional and
transformational business - all these factors have collectively lent confidence to
the company in estimating FY2015 to be a better year than FY2014. TCS also
indicated that it is reaping benefits of investments in geographies such as
Continental Europe and Latin America. The Management, however, cited a word
of caution on India business, which it expects to remain muted till 1HFY2015 due
to impending elections. Over FY2013-15E, we expect TCS revenue to post a
CAGR of 16.5% in USD terms and of 24.3% in INR terms. We maintain our
Accumulate rating on the stock with a target price of `2,520.
`2,351
`2,520
Investment Period
12 Months
Stock Info
IT
Sector
Market Cap (` cr)
460,865
(18,189)
Beta
0.5
2,258/1,255
125,358
BSE Sensex
21,265
Nifty
6,314
Reuters Code
TCS.BO
Bloomberg Code
TCS@IN
74.0
5.6
16.1
4.4
Abs. (%)
3m
1yr
3yr
Sensex
3.5
7.3
12.8
TCS
6.0
74.4
110.2
FY2011
37,324
24.3
8,715
26.8
30.0
44.5
52.8
18.1
34.3
32.0
12.1
40.4
FY2012
48,891
31.0
10,636
22.0
29.5
54.3
43.3
14.2
32.7
32.8
9.2
31.2
FY2013
62,988
28.8
13,942
31.1
28.7
71.2
33.0
11.2
34.0
32.7
7.1
24.6
FY2014E
82,169
30.5
18,920
35.7
30.8
96.6
24.3
10.0
41.2
40.2
5.4
17.6
FY2015E
97,331
18.5
22,446
18.6
30.2
114.6
20.5
8.2
40.1
38.5
4.5
15.0
Ankita Somani
+91 22 3935 7800 Ext: 6819
ankita.somani@angelbroking.com
3QFY14
2QFY14
% chg (qoq)
3QFY13
% chg (yoy)
9MFY14
9MFY13
% chg (yoy)
Net revenue
21,294
20,977
1.5
16,070
32.5
60,258
46,558
29.4
Cost of revenue
10,799
10,701
0.9
8,453
27.8
30,989
24,675
25.6
Gross profit
10,495
10,276
2.1
7,617
37.8
29,269
21,883
33.8
SG& A expenses
3,808
3,637
4.7
2,963
28.5
10,790
8,455
27.6
EBITDA
6,687
6,639
0.7
4,654
43.7
18,479
13,428
37.6
352
310
13.7
273
28.9
952
778
22.4
6,335
6,330
0.1
4,381
44.6
17,527
12,650
38.5
673
(43)
882
699
PBT
7,008
6,287
18,409
13,349
37.9
Income tax
1,652
PAT
5,355
Earnings in affiliates
213
11.5
4,594
52.5
1,556
6.2
1,003
64.8
4,440
2,893
53.5
4,731
13.2
3,592
49.1
13,969
10,457
33.6
41
29
43.6
40
3.3
157
111
41.0
5,314
4,702
13.0
3,552
49.6
13,812
10,346
33.5
EPS (`)
27.1
24.0
12.9
18.1
49.5
70.5
52.9
33.5
49.3
49.0
30bp
47.4
188bp
48.6
47.0
157bp
31.4
31.6
(25)bp
29.0
244bp
30.7
28.8
182bp
29.7
30.2
(42)bp
27.3
249bp
29.1
27.2
192bp
24.2
22.5
173bp
21.8
238bp
22.6
21.9
70bp
Minority interest
Adjusted PAT
Actual
Estimate
Var. (%)
21,294
21,434
(0.7)
31.4
31.4
(2)bp
5,314
4,955
7.3
7.3
6.1
(%)
5.4
5
4
4.4
3.3
3.1
3.0
4.1
3
2
1.8
1.3
1
3QFY13
4QFY13
1QFY14
Volume growth
2QFY14
3QFY14
1.80
1.53
1
(%)
0.74
0
(0.40)
(0.61)
(1)
Volume
Currency impact
CC realization
Broad-based show
TCS performance during the quarter was backed by healthy demand seen across
all its industry segments. The companys anchor industry segment - banking,
financial services, and insurance (BFSI) maintained its growth momentum with
revenues growing by 2.1% qoq. The company expects BFSI to grow at least in line
with the companys average in FY2014. IT spending in the BFSI industry is seen to
be coming from work related to compliance, risk monitoring and digitization.
Among other verticals, Manufacturing (+7.9% qoq), Telecom (+6.4% qoq) and
Life sciences & Healthcare (+6.6% qoq) were strong performers and were primary
growth drivers for the company. The Management indicated that the Telecom
segment is now doing better and the company may witness consistent growth from
this industry segment going ahead. The rest of the industry segments such as Retail
& Distribution, Energy & Utilities and Travel & Hospitality posted 2.3%, 3.0% and
6.1% qoq growth in revenues, respectively.
% chg (qoq)
% chg (yoy)
42.7
2.1
15.8
Manufacturing
8.8
7.9
20.7
Telecom
9.6
6.4
17.8
5.9
6.6
32.3
13.8
2.3
20.1
3.5
6.1
13.4
3.8
3.0
16.6
2.3
7.7
27.7
Hi-tech
5.3
1.1
6.6
BFSI
Service line wise, three service areas led TCS growth during 3QFY2014
Infrastructure services (+4.8% qoq), Enterprise services (+5.0% qoq) and Global
Consulting (+6.1% qoq). These verticals have collectively accounted for 51% of the
incremental revenue during the quarter. The companys anchor service line
Application Development and Maintenance (ADM) maintained its revenue growth
momentum; its revenues grew 2.3% qoq. The Management indicated that the deal
pipeline is robust for services such as ADM, Infrastructure Management,
Consulting, Enterprise Services, and Products.
% chg (qoq)
% chg (yoy)
41.4
2.3
13.9
Enterprise solutions
15.7
5.0
21.3
Assurance services
8.5
3.0
28.7
4.6
0.8
14.1
12.0
4.8
19.6
23.9
3.4
6.1
Asset-leveraged solutions
2.3
(12.2)
12.1
4.8
BPO
(4.2)
13.8
Geography wise, growth was largely led by Asia Pacific, Continental Europe and
Middle East & Africa, the revenues of which grew by 7.4%, 6.7% and 13.3% qoq,
respectively. North America grew 2.1% while UK grew by 4.8% qoq.
% chg (qoq)
% chg (yoy)
52.7
2.1
16.8
2.3
3.0
(25.5)
U.K.
17.5
4.8
16.6
Continental Europe
11.6
6.7
48.7
India
6.3
(5.9)
(3.3)
Asia Pacific
7.4
7.4
15.1
MEA
2.2
13.3
22.2
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
17,145
20,098
10,611
17,362
14,663
9,561
12,559
1,390
7,664
5,463
263,637
276,196
277,586
285,250
290,713
11.2
10.6
10.5
10.9
10.9
(%)
80
81.7
82.7
82.1
83.4
77.5
78
75.0
76
74
84.3
72.1
72
72.5
72.2
70
3QFY13
4QFY13
1QFY14
Including trainees
2QFY14
3QFY14
Excluding trainees
31.6
31.4
31
(%)
30
29.0
29
28.6
28.4
30.2
29.7
28
27
27.3
26
27.0
26.5
25
3QFY13
4QFY13
1QFY14
EBITDA margin
2QFY14
3QFY14
EBIT margin
Client metrics
The client pyramid during the quarter witnessed a qualitative improvement,
with client additions seen in higher revenue brackets. Client metrics for the
company continued to remain healthy with the company adding two clients each in
the US$50-100mn and US$20-50mn revenue bracket. Overall, the company
added 24 clients in US$1mn+ revenue category. The company signed eight large
deals in the quarter.
4QFY13
1QFY14
2QFY14
3QFY14
US$1mn5mn
278
348
348
369
378
US$5mn10mn
88
79
93
94
109
US$10mn20mn
71
90
92
99
95
US$20mn50mn
67
69
71
72
74
US$50mn100mn
31
35
34
31
33
US$100mn plus
16
17
19
22
22
FY2015
16.5
16.5
60.9
62.0
30.5
18.5
30.8
30.2
24.1
24.0
35.6
18.6
FY2015E
Earlier
Revised
Variation
Earlier
Revised
Variation
estimates
estimates
(%)
estimates
estimates
(%)
Net revenue
82,399
82,169
(0.3)
95,466
97,331
2.0
EBITDA
25,493
25,339
(0.6)
29,456
29,408
(0.2)
PBT
24,901
25,164
1.1
30,063
29,682
(1.3)
Tax
6,095
6,061
(0.6)
7,365
7,124
(3.3)
PAT
18,639
18,920
1.5
22,584
22,446
(0.6)
(`)
1,500
1,200
900
600
300
0
Apr-07
Mar-08
Price
Feb-09
25x
Jan-10
21x
Dec-10
Nov-11
16x
Oct-12
Sep-13
11x
6x
Reco
HCL Tech
Accumulate
Hexaware
CMP
Tgt. price
Upside
FY2015E
FY2015E
FY2012-15E
FY2015E
FY2015E
(`)
(`)
(%)
EBITDA (%)
P/E (x)
EV/Sales (x)
RoE (%)
1,392
1510
8.5
24.8
14.5
38.5
2.2
26.8
Neutral
143
22.8
10.1
16.6
1.4
24.5
Infosys
Neutral
3,725
26.4
17.5
13.6
3.0
20.5
Infotech Enterprises
Neutral
347
19.1
11.8
26.5
1.1
17.9
KPIT Cummins
Neutral
173
16.3
10.5
27.2
0.9
19.8
Mindtree
Accumulate
1,496
1650
10.3
20.9
11.3
35.2
1.4
23.8
Mphasis
Accumulate
418
455
9.0
18.4
9.2
6.3
0.8
14.6
NIIT
Neutral
28
7.0
7.2
(16.1)
0.1
9.4
Persistent
Neutral
1,018
25.5
13.3
29.1
1.6
19.9
TCS
Accumulate
2,351
2,520
7.2
30.2
20.5
28.2
4.5
40.1
Tech Mahindra
Neutral
1,867
22.1
14.1
19.3
0.8
25.2
Wipro
Accumulate
570
600
5.2
23.1
15.8
16.8
2.3
21.4
Company background
TCS is Asia's largest IT services provider and is amongst the top 10 technology
firms in the world. The company has a global footprint with an employee base of
over 2.9lakh professionals, offering services to more than 1,000 clients across
various industry segments. The company has one of the widest portfolios of
services offerings, spanning across the entire IT service value chain from
traditional application development and maintenance to consulting and package
implementation to products and platforms.
FY2011
FY2012
FY2013
FY2014E
FY2015E
Net sales
37,324
48,891
62,988
82,169
97,331
Cost of revenues
19,937
25,877
33,253
42,097
50,403
Gross profit
17,387
23,014
29,736
40,073
46,928
% of net sales
46.6
47.1
47.2
48.8
48.2
SGA expenses
6,189
8,599
11,648
14,734
17,520
% of net sales
16.6
17.6
18.5
17.9
18.0
11,198
14,415
18,088
25,339
29,408
% of net sales
30.0
29.5
28.7
30.8
30.2
721
904
1079
1302
1557
1.9
1.8
1.7
1.6
1.6
EBITDA
% of net sales
EBIT
10,477
13,511
17,009
24,036
27,851
% of net sales
28.1
27.6
27.0
29.3
28.6
532
404
1118
1128
1832
11,009
13,915
18,126
25,164
29,682
2,174
3,169
4,034
6,061
7,124
% of PBT
PAT
Earnings in affiliates
Minority interest
Adj. PAT
Fully diluted EPS (`)
19.7
22.8
22.3
24.1
24.0
8,835
10,747
14,092
19,103
22,559
120
111
149
183
113
8,715
10,636
13,942
18,920
22,446
44.5
54.3
71.2
96.6
114.6
10
FY2011
FY2012
FY2013
FY2014E
FY2015E
1,554
1,984
1,843
2,493
3,536
3,934
6,509
11,457
9,363
12,651
Accounts receivable
8,201
11,499
14,077
18,660
22,066
Unbilled revenues
1,349
2,248
3,160
4,052
4,800
1,449
5,200
6,455
8,194
10,043
10,909
3,379
3,493
3,506
3,506
3,506
Investments
1,839
1,478
2,040
2,040
2,040
Assets
2,575
32,788
41,199
52,074
60,672
73,291
5,834
6,806
8,751
11,072
13,257
33
11
101
101
101
100
100
100
100
100
Liabilities
Current liabilities
Short term borrowings
Redeemable preference shares
Long term debt
Other non-current liabilities
Minority interest
115
131
131
131
1,097
1,115
1,378
1,753
2,099
315
528
656
656
656
Shareholders funds
25,404
32,523
40,956
46,858
56,947
Total liabilities
32,788
41,199
52,074
60,672
73,291
11
FY2011
FY2012
FY2013
FY2014E
FY2015E
10,477
13,511
17,009
24,036
27,851
721
904
1,079
1,302
1,557
Depreciation
Exp. (deferred)/written off
Pre tax cash from oper
Other inc./prior period ad
Net cash from operations
Tax
Cash profits
(Inc)/dec in acc. recv.
(Inc)/dec in unbilled rev.
112
149
183
113
14,303
17,939
25,156
29,295
532
404
1,118
1,128
1,832
11,611
14,707
19,056
26,284
31,127
2,174
3,169
4,034
6,061
7,124
9,437
11,538
15,022
20,223
24,003
(2,391)
(3,298)
(2,578)
(4,583)
(3,406)
(148)
(899)
(912)
(892)
(748)
(3,255)
(1,127)
(4,948)
2,094
(3,288)
347
951
2,035
2,321
2,185
(5,448)
(4,373)
(6,403)
(1,061)
(5,257)
3,989
7,166
8,619
19,162
18,746
(1,750)
(2,159)
(2,819)
(3,151)
(2,423)
(Inc)/dec in investments
5,597
361
(562)
(138)
(114)
(13)
(3,275)
(1,649)
(262)
(2,718)
(3,269)
435
(3,561)
(3,656)
(5,869)
(5,692)
Inc/(dec) in debt
419
128
278
375
346
Inc/(dec) in equity
328
1,979
(1,159)
(3,852)
(2,273)
(62)
213
129
Dividends
(4,580)
(5,496)
(4,351)
(9,166)
(10,083)
(3,895)
(3,176)
(5,103)
(12,643)
(12,011)
Cash generated/(utilized)
120
11,078
529
430
(140)
650
1,043
1,025
1,554
1,984
1,843
2,493
1,554
1,984
1,843
2,493
3,536
12
Key ratios
Y/E March
FY2011
FY2012
FY2013
FY2014E
FY2015E
52.8
43.3
33.0
24.3
20.5
P/CEPS
48.8
39.9
30.6
22.8
19.2
P/BVPS
18.1
14.2
11.2
10.0
8.2
Valuation ratio(x)
1.0
0.9
0.8
0.9
0.9
EV/Sales
12.1
9.2
7.1
5.4
4.5
EV/EBITDA
40.4
31.2
24.6
17.6
15.0
EV/Total assets
13.8
10.9
8.5
7.5
6.1
EPS
44.5
54.3
71.2
96.6
114.6
Cash EPS
48.2
59.0
76.8
103.3
122.6
Dividend
23.4
20.0
19.0
22.0
22.0
Book value
130
166
209
235
286
Dupont analysis
0.8
0.8
0.8
0.8
0.8
1.1
1.0
1.1
1.0
1.1
0.3
0.3
0.3
0.3
0.3
1.1
1.2
1.2
1.4
1.3
1.3
1.3
1.3
1.3
1.3
34.8
33.0
34.4
41.6
40.3
Operating ROE
Return ratios (%)
RoCE (pre-tax)
32.0
32.8
32.7
40.2
38.5
Angel RoIC
41.1
43.3
46.3
51.4
50.6
RoE
34.3
32.7
34.0
41.2
40.1
7.2
7.6
7.7
8.2
8.9
Receivables days
80
86
82
83
83
Turnover ratios(x)
13
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or in connection with the use of this information.
Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the
latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may
have investment positions in the stocks recommended in this report.
TCS
No
No
No
No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
14