Stock Market Result Update on TCS for 2QFY2012

Stock Market Result Update on TCS for 2QFY2012 with an Accumulate recommendation.

For 2QFY2012, TCS reported modest set of numbers, lower than street’s expectations on the revenue front; however, the company outperformed on the operating front. The major highlight of the result was the 6.25% qoq volume growth and addition of two new clients in the US$100mn plus revenue bracket. Management has highlighted robust growth outlook for FY2012, with the deal pipeline being strong. TCS continues to remain our preferred pick along with HCL Tech in the IT pack. We recommend Accumulate on the share.

Quarterly highlights: For 2QFY2012, TCS posted revenue of US$2,525mn, up 4.7% qoq, majorly led by volume growth. In INR terms, revenue stood at `11,633cr, up 7.7% qoq. EBITDA and EBIT margin increased by 100bp and 94bp qoq to 29.1% and 27.1%, respectively, aided by INR depreciation against USD, which absorbed the negative impact due to promotions given during the quarter. PAT came in at `2,439cr, up merely 2.5% qoq, as the company incurred forex loss of `91cr during 2QFY2012, resulting in lower other income.

Outlook and valuation: Management maintained its hiring guidance at 60,000 gross employee additions in FY2012, with lateral fresher ratio of 38:62.
The company bagged 10 large deals in 2QFY2012. In addition, the company is currently chasing 10 large deals. Even with aggressive hiring plans, management targets to maintain utilization levels excluding trainees at 82-84% in FY2012. Thus, over FY2011-13E, we expect TCS’s revenue to post a 21% CAGR (USD terms), surpassing even the US$10bn revenue mark in FY2012 itself, after achieving the US$8bn milestone in FY2011. On account of tailwinds such as 1) strong growth even on the back of 29% growth in FY2011, 2) headroom to scale up utilization levels and 3) SGA expense optimization as a strong lever, we expect TCS to absorb the impact of wage hikes gradually. We expect the EBIT margin’s downside to be limited to 135bp yoy and settle at 26.7% by FY2013. We value TCS at 20x (10% premium to Infosys) FY2013E EPS of `61.0 with a target price of `1,220 and recommend Accumulate on the stock.