tcs initiating coverage note
TRANSCRIPT
Ta
25 June 20
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‐ 2 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Table of Contents:
S. No. Contents Page No.
1. Investment Case…………………………………………………………………………………………………………………… 03 - 03
2. Company Background…………………………………………………………………………………………………………… 04 - 04
3. Business Segments………………………………………………………………………………………………………………… 05 - 06
4. Industry Overview………………………………………………………………………………………………………………… 07 - 09
5. Investment Thesis………………………………………………………………………………………………………………… 10 - 14
6. Peer Group…………………………………………………………………………………………………………………………… 15 - 16
7. Key Management Personnel…………………………………………………………………………………………………… 17 - 17
8. Valuation……………………………………………………………………………………………………………………………… 18 - 18
9. PE Bands……………………………………………………………………………………………………………………………… 18 - 18
10. Key Risks……………………………………………………………………………………………………………………………… 19 - 19
11. Financials…………………………………………………………………………………………………………………………… 20 - 20
12. Disclaimer…………………………………………………………………………………………………………………………… 23 - 23
‐ 3 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
We rate Tata Consultancy Services Limited (TCS) a ‘BUY’. Our rating underpins
the company’s leading position in the Indian IT space, strong growth in
business volumes, GNDMTM for better catering of customers’ needs, non linear
growth drivers, strong R&D, and its history of rewarding shareholders.
However, a dull European business environment and currency headwinds
impede our optimism a bit.
Investment Case
TCS’ large size enables it to provide one stop solutions for entire set of
customer needs. This factor puts the company in a better position while
negotiating for new deals and helps it to retain business from the existing
clients.
Under GNDMTM model, TCS established delivery centers at different
geographical locations across the globe. The model enables the company to
collaborate on projects and leverage the asset base of different locations.
TCS is also focusing on non linear levers to drive its future growth, which
include – Financial Solutions, Platform based BPO, and iON. These solutions,
with strong market response may help the company keep its growth levers
intact in the upcoming quarters.
TCS’ R&D initiatives are focused on staying competitive in the market and
remain proactive to changes in the IT space, the company possesses
wealthy IP assets with 68 patents granted across various domains.
In addition, TCS’ management continues to reward shareholders with
regular dividend payouts, which add on to their returns periodically. The
company has distributed ~48% of its cash generated since FY2005 as
dividends.
TCS – Financials at a glance (all data in ` Crores unless specified)
TCS – Size does Matter
BUY Sector- Information Technology
Current Market Price (`) 1,136.20
Target Price (`) 1,388.70
Annualized Upside 12.7%
52 Week High / Low (`) 1,247.00 / 725.50
Market Capitalization (In ` Crs) 222,379.45
Market Data & Target Price
BSE Code 532540
NSE Code TCS
Bloomberg Ticker TCS IS Equity
Face Value (`) 1.00
FY2011 EPS (`) 46.32
Current P/E 25.9x
Average P/E 24.2x
Beta vs Sensex 0.91
PEG Ratio 1.14
Average Daily Volmes 193,275
STOCK SCAN
-25
0
25
50
75
24-Jun-10 23-Sep-10 23-Dec-10 24-Mar-11 23-Jun-11
Retu
rn (
%)
TCS SENSEX
‐ 4 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Company Background
TCS is one of the most integral parts of ~$98.7 Bn Tata group. Foundation of it was rooted in formation
of a division of Tata Sons in 1968. Over the four decades of its formation, the division assisted in
shaping the Indian IT space. The division, which got its first international client in 1971, crossed `10 Bn
revenues mark in late nineties. TCS was incorporated as RR Donnelley (India) Private Limited in
January 1995, which was wholly owned by RR Donnelley and Sons Company through its Mauritius
subsidiary. Tata Sons acquired the entire stake of RR Donnelley and Sons Company in RR Donnelley
(India) Private Limited during June 2000. With this, the latter became a wholly owned subsidiary of
Tata Sons. The company’s name was subsequently changed to Orchid Print Media Limited in March
2001 and finally it became Tata Consultancy Services Limited (TCS) in December 2002. The company’s
subsequent progress is depicted briefly in the graph below:
From just a business division of its parent Tata Sons, TCS emerged as the leading software exporter in
the Indian IT industry. The company’s top line touched $8.2 Bn in FY2011 while it reported Net profits
of more than $1.9 Bn during the year. In addition, TCS is amongst one of the largest employers of the
country with employee base of 198,614 at the end of FY2011. The company is present across the
globe with 145 offices in 42 countries. Moreover, TCS had 106 delivery centers in 20 countries at the
end of the year. In ` terms the company’s top line stood at `37,324.51 Crores whereas its bottom line
remained at `9,068.04 Crores. TCS earned more than 90% of total revenues from the global markets
during the year.
Source: Company Data, Microsec Research
‐ 5 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Business Segments
TCS segregates its revenues on the basis of geographies it caters to. In addition, the company divides
the top line based on revenues from different industry verticals and according to Service Offerings.
On a geographical basis, TCS primarily reports four segments – US, Europe, India, and Rest of the
World (RoW). While the US continues to account for a large chunk of the company’s top line, business
from Europe and RoW are gaining momentum. As a result, the share of these geographies, on a y-o-y
basis, increased in TCS’ top line whereas contribution by US witnessed a decline in Q4 FY2011. Growth
in revenues from India remained in line with the company’s overall top line expansion. Consequently,
the share of country in TCS’ top line declined just 10 basis points (bps) y-o-y to 8.80% in Q4 FY2011.
The following exhibit reflects the geographical revenue break up of TCS in Q4 FY2011 and Q4 FY2010.
The industry verticals, which TCS caters to, are broadly divided into 10 heads. These heads are –
Banking, Financial Services and Insurance (BFSI), Manufacturing, Retail and Distribution, Hi-Tech, Life
Sciences and Health Care, Transportation, Energy and Utilities, Media and Entertainment, and Others.
BFSI continued to account for a large share of the company’s top line pie. However, its share has
declined, over the last year, in Q4 FY2011. Nevertheless, new areas such as – Transportation, Life
Sciences and Health Care, and Media and Entertainment registered an enhanced revenue share, on a
y-o-y basis, in Q4 FY2011. This is shown in the exhibit below:
Source: Company Data, Microsec Research
Source: Company Data, Microsec Research
‐ 6 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
As per Service Offering segmentation, TCS report its top line in five segments – IT Solution and
Services, Engineering and Industrial Services, Infrastructure Services, Global Consulting, Asset
Leverage Solutions, and Business Process Outsourcing. IT Solution and Services, further divided into
Application Development and Maintenance, Business Intelligence, Enterprise Solutions, and Assurance
Services, continues to remain the dominant revenue contributor in Q4 FY2011. Among these services,
Application Development and Maintenance account for the highest share. The company’s revenue
spread across the Service Offerings is depicted below:
Trend of change in geographical mix is expected to continue in the upcoming quarters as well. While
share of matured economies such as Europe and US is expected to decline gradually, India and RoW
may witness incremental share in top line. Among the Industry verticals, Health Care, Media and
Entertainment, and Life Sciences may beat the company’s average growth. While IT Solution and
Services likely to remain key contributor amid the services, Infrastructure Services are expected to
gain momentum. As a result, share of these verticals in TCS’ top line is expected to increase in the
medium term.
Source: Company Data, Microsec Research
‐ 7 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Industry Overview
Global Scenario
According to National Association of Software and Services Companies (NASSCOM) estimates, global
spending on technology and related products and services augmented 4.0% y-o-y to $1.6 Tn in 2010.
IT Services spend increased 1.4% y-o-y to $574.0 Bn while BPO spend jumped 3.9% to $158.0 Bn
during the year. Among the geographies America remained on top followed by Europe and Asia Pacific
(APAC) Region. A brief overview of the same is depicted in the graph below:
Global IT Services Spend – Geographical Break up
Global BPO Spend – Geographical Break up
The global industry trends remained positive in 2010 and expected to stay upbeat in the upcoming
quarters as well. Players in some of the favorable IT destinations such as India are expected to
significantly benefit from the same. The country’s dominance is likely to continue with its expertise
and ability to offer quality services in the IT and ITES domains.
Source: Nasscom, Microsec Research
Source: Nasscom, Microsec Research
‐ 8 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Indian IT Industry
The Indian IT industry remained a key contributor to India’s overall economic development. According
to NASSCOM IT BPO sector strategic review 2011, Indian IT sector is estimated to clock revenues of
$88.1 Bn in FY2011. While a major part of the same is expected to continue coming from overseas
software markets, hardware and domestic markets also accounts for a sizable portion of industry.
Of total revenues of $88.1 Bn, $12 Bn came from Hardware segment while IT Software and Services
accounted for the remaining $76.1 Bn. Moreover, exports contributed for ~78% of the total revenues
of IT Software and Services segment. Aggregate direct employment from the IT space is estimated to
reach 2.5 Mn in FY2011. In addition, the industry created ~8.3 Mn indirect jobs as per NASSCOM
estimates. The sector’s share in total Indian exports grew from just 4% in FY1998 to 26% in FY2011.
Furthermore, the industry’s revenues as a percentage of GDP increased from 1.2% to an estimated
6.4% during FY1998-2011 period.
Among geographies, US is likely to remain the largest contributor whereas Banking Financial Services
and Insurance (BFSI) is estimated to be the largest vertical in the country’s export pie. Additionally, IT
Services segment represented 57% of total exports followed by Business Process Outsourcing (BPO),
and Engineering Design and Products Development segment. We expect this analogy to remain intact
in medium term as well.
0.0%
10.0%
20.0%
30.0%
1998 2011E
Share in total Indian Exports
0.0%
3.0%
6.0%
9.0%
1998 2011E
Revenues as a % og GDP
Source: Nasscom, Microsec Research
Source: Nasscom, Microsec Research
Indian IT Sector Software Revenues
‐ 9 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Outlook
In its Strategic Review 2011, NASSCOM predicted the global IT Services spend to increase to $684.0 Bn
by 2014 from current levels of $574.0 Bn. BPO spending is also expected to grow to $201.5 Bn by
2014. Spending on both IT Offshoring and outsourcing is also likely to support the growth in overall
spending in IT services. The following charts show the predicted growth in the IT Services and BPO
spend over 2010P-2014E periods.
Among the concerns over visa issues and adverse geopolitical environment in Europe, a short lived
slow down may be witnessed in the industry. However, the industry body expects a growth of 16-18%
in IT exports from India. According to NASSCOM president Mr. Som Mittal, “The US private sector is
doing reasonably well. So, we are not too worried. The problem is in the macro-economic scenario and
unemployment. There are also concerns over the debt situation in Europe and whether tax rates will
go up. But, by and large, the private business is doing well. So we will not revisit our forecast, unless
there is a major economic upheaval.”
Our view coincides with the industry body. We believe that a large part of overall growth of the sector
will be contributed by major Indian IT exporters. As a result, our view remains positive on the sector.
Among the top four players – TCS, Infosys Ltd (Infosys), Wipro Ltd (Wipro), and HCL Technologies Ltd
(HCL), TCS being the largest could capture the largest part of the growth.
0.0
150.0
300.0
2010P 2014E
158.0 201.5
BPO Spend
CAGR 6.3%
500.0
600.0
700.0
2010P 2014E
574.0
684.0
IT Services Spend
CAGR 4.5%
Source: Nasscom, Microsec Research
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25 June 20
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FY2008 Total Income 22,619 Crores
Net Profit 5,026 Crores
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Analyst: n
TTE
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Microsec Re
npdaga@micros
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‐ 11 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Investment Thesis - Size does matter
TCS is the country’s largest software exporter. The company’s top line is more than 35% higher than
its nearest competitor Infosys while its net profit is ~33% more than that of Infosys. The gap is
continuously widening between these two entities since last seven quarters. TCS is present across the
globe with 145 offices in 42 countries and 106 delivery centers in 20 countries. In addition, TCS’ broad
service offerings and integrated solutions help it to provide one stop solutions to its customers’ needs.
The company’s services portfolio consists of Application Development and Maintenance, Business
Intelligence, Enterprise Solutions, Assurance, Engineering and Industrial Services, IT Infrastructure
Services, Business Process Outsourcing, Consulting, and Asset Leverages Solutions. Through these
services, TCS captures needs of all its customers, in different verticals, spread across the globe. The
company’s diversified operations and large size helped it to bag healthy growth in business volumes
over last several quarters. In addition, these attributes coupled with TCS’ healthy balance sheet helped
it successfully sail through the headwinds such as exchange fluctuations and pricing pressures. A brief
overview of contributors in the company’s top line growth is shown in the following Exhibit.
As represented in the Exhibit above, TCS’ revenue growth in last eight quarters was largely driven by
strong volumes, even on a large base. This factor provided the company enough muscle to counter
with the sharp sequential appreciation of ` against $ during Q3 FY2010, Q4 FY2010, Q1 FY2011, and
Q3 FY2011. We believe volumes will remain the key contributor in TCS’ revenue growth in the
upcoming quarters as well. In addition, the top line growth in expected to be supported by an
improved pricing environment. We expect a more than 20% volume growth in FY2012E and FY2013E
while we expect a 1.0% and 0.5% improvement in prices during FY2012E and FY2013E respectively.
Global Network Delivery Model TM adds value
To enhance efficiency and better cater the customer needs, TCS established a unique Global Network
Delivery Model TM (GNDMTM). With the model, the company creates value for its customers by helping
them optimize their operations while pursuing new growth initiatives. Under GNDMTM TCS delivers
services to clients through its services centers spread across India, China, Europe, North America, and
Latin America. The following Exhibit depicts TCS’ solution centers across the globe.
-12.0%
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0.0%
4.0%
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Pricing Volume Efforts Exchange Differences Aggregate Revenue Growth
Source: Company Data, Microsec Research
25 June 20
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‐ 12 ‐
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‐ 13 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
TCS launched iON, a 3rd generation Service Delivery Model, in 2011. Embraced with Cloud Computing,
it is the world’s first fully integrated IT solution for Small and Medium Businesses (SMBs). The product,
pre configured with hardware, network and software, caters to all the IT needs of SMBs without
investing significantly in the IT assets. In addition, iON, using pay-per-use business model, offers easy
scalability at an affordable cost. Furthermore, the product is supported by business, technical and
consultancy services. TCS offers iON to more than 150 SMBs and has created eco-system of over 90
Cloud Services Partners across India to provide impeccable services to clients.
Non linear services, with above average top line expansion vis-à-vis overall revenues, will provide
extra push to TCS’ performance, in our view.
Customer centric organizational structure aids to margins
In the gloomy scenario of late 2008, when global financial crisis put forth the global slowdown, it was
tough to maintain growth as well as profitability. Consequently, the corporate went on streamlining
and reorganizing their businesses to limit the impact of the same on their businesses. TCS, being on
the same side, rolled out a customer centric organizational structure in 2008:
To curb the potential loss of agility, which could have outgrown its structure
To focus on the right sectors for the future growth
The structure while focusing on customer satisfaction enabled TCS to provide agility through
reorganization of the company’s business into multiple small operating units. Each of these units
pursues growth strategies in respective domain through its own resources. This factor helps these
units to increase their business at best pace with expertise and focus. Moreover, the units, consisting
of ~3,000 – 14,000 employees, have to manage their own costs and are liable for the profitability.
TCS witnessed the effectiveness of the structure in last two years, which helped it to exercise effective
utilization of various operational levers and subsequently streamline operating costs. In addition, the
company reported healthy improvement in utilization levels while keeping the attrition at an industry
Source: Company Data, Microsec Research
‐ 14 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
low level. Consequently, the company registered continued improvement in margins over FY2010 and
FY2011. As a large employee base helps TCS to keep enough human resource buffer to cater the
future growth, its management indicated the utilization levels to remain high in the upcoming quarters
as well. With this, we believe that the company’s current margins are sustainable. However, a tax
payment related to previous years may affect TCS’ post tax profits in FY2012E. We factored in the
same and assumed an effective tax rate at 23.0%, which is 640 bps higher than FY2011, for FY2012E.
R&D and innovation provides edge over competition
In order to keep pace with the ongoing developments in industry, TCS provides a strong focus on
Research and Development (R&D) activities. On one side, R&D helps the company to meet the current
customer needs with innovative offerings, on the other it helps to prepare for the upcoming changes in
the industry. Innovation differentiates TCS’ offerings from peers and acts as an edge over competition
while applying for a new deal.
Additionally, TCS believes in promoting the culture of recognizing inventions within the company. In
line with this, the company formed a dedicated Intellectual Property Recognition (IPR) cell during
FY2011. Key functions of the cell will include formation of an effective portfolio of IP assets. At the end
of FY2011, TCS was granted 68 patents while the company has filed more than 448 patents in different
jurisdictions. We believe that the future oriented patents could support TCS’ performance in the
upcoming quarters.
Continued dividend payments add on to stock returns
In order to provide value returns to its shareholders, TCS from more than 25 consecutive quarters is
providing dividends. Of the total cash generated since FY2005, the company has distributed 48% as
dividends. The pictorial presentation of sharing of cash generated from FY2005 is as follows:
We believe that TCS will remain committed to reward the shareholders in future as well. With this, the
dividends are expected keep on additions to investors’ return kitty, going forward.
Capital Expenditure
7,451
Acquisitions5,566
Dividends11,937
Sharing of Cash Generated since FY2005 (in ̀ Crore)
Source: Company Data, Microsec Research
‐ 15 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Peer Group – TCS versus Infosys – ‘The Bellwether Race’
Considering TCS’ size, its presence across the globe, and market capitalization, we selected Infosys
Technologies Ltd (Infosys), its nearest competitor, in the peer group. These two account for more than
15% of the total Indian IT exports. Furthermore, the giants are the trendsetters for the entire industry
as well. A brief overview of both the companies’ operations is reflected below:
We analyzed the performance of Infosys and TCS based on the following five fundamental parameters
over the last twelve quarters’ reported numbers:
1. Sequential growth in Revenues
‐4.0%
0.0%
4.0%
8.0%
12.0%
16.0%Revenues Growth over the period
INFY TCS
‐10.0%
‐5.0%
0.0%
5.0%
10.0%
15.0%
20.0%PAT Growth over the period
INFY TCS
75,000
100,000
125,000
150,000
175,000
200,000 Headcount over the period
INFY TCS
10.0%
13.0%
16.0%
Attrition over the period
INFY TCS
‐20.0%
‐6.0%
8.0%
22.0%
36.0%
50.0%
64.0%Returns over FY2011
INFY TCS
1,300.0
1,600.0
1,900.0
2,200.0
2,500.0 Market Capitalization (in ̀ Bn) over FY2011
INFY TCS
15.0%
18.0%
21.0%
24.0%
27.0%
30.0%PAT Margins over the period
INFY TCS
15.0
18.0
21.0
24.0
27.0
30.0
33.0 PE (x) over FY2011
INFY TCS
Source: Company Data, Microsec Research, Bloomberg
‐ 16 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
2. Q-o-Q increase in Net Profit
3. Total Headcount
4. Attrition Levels
5. PAT Margins
We found that TCS witness a sharp continuous improvement in performance from Q2 FY2009. The
implementation of customer centric organizational structure started providing fruits from that period.
While on the revenue growth front, the company outperformed Infosys in last three quarters, rise in
profits outperformed the nearest peer in most of the times during last eight quarters. The company’s
PAT Margins, lagging 547 bps in Q1 FY2008, are now slightly higher than Infosys. The headcount and
attrition gap also reflects TCS’ superiority over Infosys.
We also analyzed TCS’ stock performance over FY2011, which represents the period when TCS
outperformed Infosys on most of the fundamental factors. For this, we selected three parameters:
1. Price-to-Earnings (PE) Multiple
2. Stock Returns
3. Market Capitalization
The gap in PE multiple, between Infosys and TCS, narrowed down, to almost ‘nil’, during FY2011.
Furthermore, TCS provided whopping returns of 48.5% over FY2011 vis-à-vis Infosys’ 22.6%.
Additionally, the company’s market capitalization, just 3.1% higher than that of Infosys at the
beginning of the year, had a 24.5% premium over Infosys at the end of the year.
Based on above factors coupled with likely sustainability of the TCS’ growth momentum, we believe
that it is all set replace Infosys as the Bellwether of the Industry.
Peer Group Table
Particulars TCS Infosys
Net Sales 37,324.51 27,501.00
Growth (%) 24.30% 20.93%
EBITDA 11,178.36 8,958.00
EBITDA Margins (%) 29.95% 32.57%
Net Profit 9,068.04 6,823.00
Net Profit Margins (%) 24.30% 24.81%
Net Profit Growth (%) 29.53% 8.89%
EPS 46.27 119.41
BVPS 124.69 477.85
P/E 25.95 23.23
P/BV 9.63 5.81
EV/EBITDA 20.37 15.83
RoE 37.2% 25.0%
Source: Companies' Data, Microsec Research
‐ 17 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Key Management Personnel
TCS is led by well educated and highly qualified professionals and industry veterans. The company’s
management helped it ride through the sub-prime crisis waves successfully by implementing right
strategies and frameworks at the right time. A glimpse of TCS’ management is depicted in the exhibit
below:
Continuing with its Customer Centric Organizational Structure, TCS recently made significant changes
in the same. Under this, the company’s CEO Mr. N. Chandrasekaran created small group of eight
leaders to oversee work of its multiple business units. These leaders will directly report to the CEO. The
eight units are further aligned 25 operating units. According to Mr. Kedar Shirali, Director of Investor
Relation, “This is not a consolidation…existing P&Ls have been retained; the empowerment, ownership
and accountability levels of the ISU-heads remain unchanged. In addition, stack owners will be
measured on the synergistic benefits expected from the alignment, such as improved win-ratios and
various operational metrics.” The management’s continued review and customer centric approach will
remain instrumental in TCS’ future performance, in our view.
Source: Company, Microsec Research
‐ 18 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Valuation
We adopted a comparable valuation method to value TCS based on Price-to-Earnings (P/E) multiples.
Historically, the company traded on a five year average P/E multiple of 24.2x. This reveals a discount
to the peer group average P/E of 25.4x for the same period. In the longer run, we expect the company
to trade at a premium over the peer group average P/E based on its outperformance. With this, we
anticipate the P/E gap, of TCS and Industry to stand at 0.5x in subsequent years. As a result, to arrive
at a target P/E multiple for TCS we applied a 19% discount to five year average P/E of peer group.
Adding the premium, this resulted in a targeted P/E multiple of 21.1x for the company, which on
FY2013E EPS of `65.88, reflects a target price of `1,388.70, inclusive of dividend payments, for the
stock. Our target price translates a 22.2% upside over TCS’ current stock price. On an annualized
basis, this translates into returns of 12.7%. Following table represents the sensitivity of our target price
to variation of target PE multiples and EPS levels.
1,388.70 19.08 20.08 21.08 22.08 23.08
63.88 1218.70 1282.60 1346.50 1410.40 1474.30
64.88 1237.80 1302.70 1367.60 1432.50 1497.40
65.88 1256.90 1322.80 1388.70 1454.50 1520.40
66.88 1276.00 1342.90 1409.70 1476.60 1543.50
67.88 1295.10 1362.90 1430.80 1498.70 1566.60
PE Bands
‐
400.00
800.00
1,200.00
1,600.00
2,000.00
18.0 x 21.0 x 24.0 x 27.0 x CMP
PE
EPS
Source: Microsec Research, Bloomberg
Source: Microsec Research
‐ 19 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Key Risks
TCS’ efforts to adapt the ongoing changes in global environment are commendable. In addition, the
company has developed a Enterprise-wide Risk Management program to address various strategic,
operational, financial, and compliance-related risks. However, there are some external factors which
could impact TCS’ performance in the near term, which may lead to a downward revision in our share
price. These factors are depicted below.
Geo-political environment in Europe, especially in Greece, and Middle East remains
challenging. While Greece is on the verge of defaulting, anti-government movements in Middle
East keep the business environment dull. As a large share of TCS’ revenue pie comes from
these geographies, these factors may negatively impact its revenue growth.
Visa issues in the US emerged could also impact TCS’ performance. As the rejection rate of
Visas in the US has increased significantly, it may force the company to hire local talent for
servicing its customers. This factor is likely to be unfavorable for TCS’ cost benefit structure
and subsequently can trim its bottom line growth.
Currency movements continue to remain a key driving force of the company’s performance.
Appreciation of ` against other global currencies adversely affect its performance whereas
depreciation of the same remains favorable. As a result, a higher than expected appreciation
in the `, particularly against $, will impact TCS’ overall performance adversely in our view.
Although these factors may impact the performance of TCS in short to medium term, the long term
prospects of the company remain intact. The current bailout package for Greece by IMF and sanction
to adopt austerity measures may improve the situation in Europe. Furthermore, the need for cost
cutting can even pose some new business opportunities. The company’s GNDMTM model is likely to help
it manage balance with US visa issues. We believe that TCS’ large size, diversified geographical
presence, and revenues’ spread across various industry verticals will remain supportive in countering
these risks.
‐ 20 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Financial Statements
Income Statement (Quarterly) Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 E Q2 12 E Q3 12 E Q4 12 E
Net Revenues 8,217.28 9,286.39 9,663.35 10,157.49 10,652.71 11,533.74 11,957.87 12,292.04
Salaries and Wages 3,039.05 3,411.19 3,552.23 3,723.63 4,034.95 4,290.98 4,326.09 4,346.56
Overseas business expenses 1,253.74 1,390.40 1,405.57 1,479.50 1,544.64 1,672.39 1,733.89 1,782.35
Other Operating Expenses 1,514.99 1,708.63 1,805.89 1,861.33 1,970.75 2,133.74 2,212.21 2,274.03
EBIDTA 2,409.50 2,776.17 2,899.66 3,093.03 3,102.37 3,436.63 3,685.68 3,889.10
Depreciation and Amortization 161.53 172.46 188.39 212.88 204.73 213.72 222.99 232.41
EBIT 2,247.97 2,603.71 2,711.27 2,880.15 2,897.64 3,222.91 3,462.69 3,656.69
Interest 2.68 15.28 4.87 3.65 1.87 1.87 1.87 1.87
Other Income 95.46 70.75 194.21 243.58 106.53 115.34 119.58 122.92
Profit Before Taxes 2,340.75 2,659.18 2,900.61 3,120.08 3,002.30 3,336.37 3,580.40 3,777.74
Provision for Taxes: 402.80 460.14 504.14 463.75 690.53 767.37 823.49 868.88
Net Profit before Tax & MI 1,937.95 2,199.04 2,396.47 2,656.33 2,311.77 2,569.01 2,756.91 2,908.86
Share of Profits of Associates 0.30 - - - - - - -
Minority Interest 31.58 29.83 26.64 33.40 28.90 32.11 34.46 36.36
Net Profit after Tax & MI 1,906.07 2,169.21 2,369.83 2,622.93 2,282.87 2,536.89 2,722.44 2,872.50
Diluted EPS 9.74 11.08 12.08 13.43 11.66 12.96 13.91 14.68
Income Statement (Annual) FY2011A FY2012E FY2013E
Net Revenues 37,324.51 46,436.36 55,875.90
Salaries and Wages 13,726.10 16,998.58 20,105.86
Overseas business expenses 5,529.21 6,733.27 8,032.16
Other Operating Expenses 6,890.84 8,590.73 10,267.20
EBIDTA 11,178.36 14,113.78 17,470.69
Depreciation and Amortization 735.26 873.85 1,008.15
EBIT 10,443.10 13,239.93 16,462.53
Interest 26.48 7.48 7.48
Other Income 604.00 464.36 502.88
Profit Before Taxes 11,020.62 13,696.81 16,957.94
Provision for Taxes 1,830.83 3,150.27 3,900.33
Net Profit before Tax & MI 9,189.79 10,546.54 13,057.61
Share of Profits of Associates 0.30 - -
Minority Interest 121.45 131.83 163.22
Net Profit after Tax & MI 9,068.04 10,414.71 12,894.39
Diluted EPS 46.27 53.21 65.88
Balance Sheet (Annual) FY2011A FY2012E FY2013E
Shareholders' Funds 24,504.81 34,919.52 47,813.91
Minority Interest 458.17 590.00 753.22
Loan Funds 74.80 74.80 74.80
Deferred Tax Liabilities 109.49 109.49 109.49
TOTAL FUNDS EMPLOYED 25,147.27 35,693.81 48,751.42
Fixed Assets 5,716.27 6,748.48 8,029.67
Goodwill (On Consolidation) 3,232.00 3,232.00 3,232.00
Investments 1,762.67 1,762.67 1,762.67
Deferred Tax Assets (Net) 160.18 160.18 160.18
Net Current Assets 14,276.15 23,790.48 35,566.91
TOTAL USES OF FUNDS 25,147.27 35,693.81 48,751.42
Cash Flow (Annual) FY2011A FY2012E FY2013E
Operating Profit before WC change 11,042.75 14,570.66 17,966.09
Cash Generated From Operations 8,915.09 12,671.58 16,103.02
Operating Cash Flow 6,638.09 9,521.31 12,202.70
Investing Cash Flow (1,531.25) (1,906.06) (2,289.34)
Financing Cash Flow (4,658.90) - -
Cash Balance at beginning 1,024.37 1,502.59 9,117.84
Net increase / (decrease) in cash 447.94 7,615.25 9,913.35
Exchange Differences 30.28 - -
Deposits (maturity over 3 months) 5,849.38 5,875.50 5,875.50
Restricted Cash 26.12 - -
Cash carried to BS 7,378.09 14,993.34 24,906.69
Source: Company Data, Microsec Research RoE is calculated on Closing Basis All data in ` Crores unless specified Shaded part reflects estimates
‐ 21 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
Microsec Research: Phone No.: 91 33 30512100 Email: [email protected]
Ajay Jaiswal: President, Investment Strategies, Head of Research: [email protected]
Fundamental Research
Name Sectors Designation Email ID
Nitin Prakash Daga IT, Telecom & Entertainment AVP-Research [email protected]
Naveen Vyas Midcaps,Market Strategies AVP-Research [email protected]
Nitesh Goenka BFSI,Metal & Mining Sr. Research Analyst [email protected]
Abhisek Sasmal BFSI Research Analyst [email protected]
Sutapa Roy Economy Research Analyst [email protected]
Gargi Deb Agriculture & Pharma Executive Research [email protected]
Ravi Gupta Midcaps Executive Research [email protected]
Technical & Derivative Research
Vinit Pagaria Derivatives & Technical VP [email protected]
Ranajit Saha Technical Research Sr. Manager [email protected]
Institutional Desk
Rajiv Lilaramani Institutional Equities Sr. Manager [email protected]
Dhruva Mittal Institutional Equities Manager [email protected]
PMS Division
Siddharth Sedani PMS Research AVP [email protected]
Sarmistha Rudra PMS Technical Research Analyst [email protected]
Research: Financial Planning Division
Shrivardhan Kedia FPD Products Manager Research [email protected]
Research-Support
Subhabrata Boral Research Support Executive [email protected]
MICROSEC RESEARCH IS ACCESSIBLE ON BLOOMBERG AT <MCLI>
Rating Scale
Recommendation Expected absolute returns (%) over 12 months
Strong Buy >20%
Buy between 10% and 20%
Hold between 0% and 10%
Underperform between 0% and -10%
Sell < -10%
‐ 23 ‐
Tata Consultancy Services Limited
Microsec Research 25 June 2011
Analyst: [email protected]
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