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Initiat ting Cover rage Note e Tata Consultancy Services Lim T mited Sector: I T Rating: B BUY Targ Price:

` get `1388.70

Ta Co sult cy Ser ces ata ons tanc rvic s


The ron T e fr ntier o th of he Be wet er R ce ellw the Rac
Strong V Volumes Growth G GNDMTM Enhance Utilizat ed tion R&D Non Line ear Initiat tives
Key Driv vers & Positiv ves to prop pel perform mance

KEY H HEADWIN NDS Eu uropean D Debt Crisi is Cu s urrency H Headwinds Visa issues in the US

Investme ent Thesis

Resea arch An nalyst:


Nit Prakash Daga tin AVP Resear A rch Micro osec Capital Limited l npd daga@micro osec.in +9 33 3051 2 91 2172
Analyst: n npdaga@micros osec.in

1 Size Does Mat tter


25 June 20 011

Microsec Research


Table of Contents:
S. No. Contents

Tata Consultancy Services Limited

Page No. 03 - 03 04 - 04 05 - 06 07 - 09 10 - 14 15 - 16 17 - 17 18 - 18 18 - 18 19 - 19 20 - 20 23 - 23

1. Investment Case 2. Company Background 3. Business Segments 4. Industry Overview 5. Investment Thesis 6. Peer Group 7. Key Management Personnel 8. Valuation 9. PE Bands 10. Key Risks 11. Financials 12. Disclaimer

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Analyst: npdaga@microsec.in
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TCS Size does Matter BUY


Sector- Information Technology

Tata Consultancy Services Limited

We rate Tata Consultancy Services Limited (TCS) a BUY. Our rating underpins
1,136.20 1,388.70 12.7% 1,247.00 / 725.50 222,379.45

Market Data & Target Price Current Market Price (`) Target Price (`) Annualized Upside 52 Week High / Low (`) Market Capitalization (In ` Crs)

the companys 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
STOCK SCAN BSE Code NSE Code Bloomberg Ticker Face Value (`) FY2011 EPS (`) Current P/E Average P/E Beta vs Sensex PEG Ratio Average Daily Volmes 532540 TCS TCS IS Equity 1.00 46.32 25.9x 24.2x 0.91 1.14 193,275

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)

75

50
Return (%)

25

-25 24-Jun-10 23-Sep-10 23-Dec-10 24-Mar-11 23-Jun-11


TCS SENSEX

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Company Background

Tata Consultancy Services Limited

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 companys 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 companys subsequent progress is depicted briefly in the graph below:

Source: Company Data, Microsec Research

From just a business division of its parent Tata Sons, TCS emerged as the leading software exporter in the Indian IT industry. The companys 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 companys 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.

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Business Segments

Tata Consultancy Services Limited

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 companys 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 companys 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.

Source: Company Data, Microsec Research

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 companys 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

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Analyst: npdaga@microsec.in

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Microsec Research

Tata Consultancy Services Limited

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 companys revenue spread across the Service Offerings is depicted below:

Source: Company Data, Microsec Research

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 companys 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.

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Industry Overview
Global Scenario

Tata Consultancy Services Limited

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

Source: Nasscom, Microsec Research

Global BPO Spend Geographical Break up

Source: Nasscom, Microsec Research

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 countrys dominance is likely to continue with its expertise and ability to offer quality services in the IT and ITES domains.

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Indian IT Industry

Tata Consultancy Services Limited

The Indian IT industry remained a key contributor to Indias 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.
Indian IT Sector Software Revenues

Source: Nasscom, Microsec Research

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 sectors share in total Indian exports grew from just 4% in FY1998 to 26% in FY2011. Furthermore, the industrys revenues as a percentage of GDP increased from 1.2% to an estimated 6.4% during FY1998-2011 period.
R evenues as a % og GDP S h are in total Indian Exports

9.0% 6.0% 3.0% 0.0% 1998 2011E

30.0% 20.0% 10.0% 0.0% 1998 2011E

Source: Nasscom, Microsec Research

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 countrys 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.

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Outlook

Tata Consultancy Services Limited

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.
IT Services Spend B PO Spend

700.0

CAGR 4.5%

300.0 684.0

CAGR 6.3%

600.0 574.0 500.0 2010P 2014E

150.0

158.0

201.5

0.0 2010P 2014E

Source: Nasscom, Microsec Research

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.

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INVES MENT NV STMEN TH SIS THES S

Tata Consultancy Services Lim T mited

FY Y2009 Total Income 13 `27,81 Crores Net Profit t `5,311 Crores FY2008 Total Income T `2 22,619 Crores Net Profit `5 5,026 Crores

FY2010 0 Total Income `30,029 Cr rores Net Prof fit `7,001 Cro ores

FY2011 Tot Income tal `37, ,325 Crores Net N Profit `9,0 068 Crores

SIZ S ZE DOES MAT ER OE MATTE


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Investment Thesis - Size does matter

Tata Consultancy Services Limited

TCS is the countrys largest software exporter. The companys 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 companys 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 companys 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 companys top line growth is shown in the following Exhibit.
16.0% 12.0% 8.0% 4.0% 0.0% -4.0% -8.0% -12.0%

Q- o-Q Revenue growth contributors

Pricing

Volume

Efforts

Exchange Differences

Aggregate Revenue Growth

Source: Company Data, Microsec Research

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.

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Tata Consultancy Services Lim T mited

Source: Company Data ta

Across th globe serv he vice centers equip TCS w with better competency t bag local IT projects in the to respective locations. Moreover, GN e M NDMTM ensure One Glob Service St es bal tandard thro ough collabor ration of project and leverag ts ging assets. Non linear initiatives additional lev vers for the g growth As a part of its strategic growth in nitiatives, TCS also focuse on tapping lucrative no linear bus es g on siness opportuni ities. The attractiveness o the initiativ of ves lies in the attribute th they allow the compa hat w any to drive rev venue growth without a proportiona increase in number o employees These ser h al of s. rvices primarily include clou based sof ud ftware services, managed services an accelerate solutions. TCS d nd ed non-linear offerings are currently divided into three segm a o ments, which are depicted in the follo d owing on vities, we believe, will provide levers to future grow of the com o wth mpany. graph. No linear activ Financial Solutions he global financial institu elp utions to enhance competitiven ness in capit markets, banking tal urance doma ains using wide products and and insu services portfolio of TCS. The co ompany offer these rs b BaNCS in about 80 services under the brand TCS B 7 to countries. BaNCS consists of 27 modules t cater b across the financial different lines of businesses a nt active clients at the s industry. The segmen had 271 a end of FY2011.
Source: Com mpany Data, M Microsec Resea arch
Platfor rm based BPO O Fina ancial Solu utions iON

B under The Platform based Business Process Outsourcing (BPO) represents a new business model, u CS b cesses of cust tomers at its own technology platform The service also m. e, which, TC executes business proc known as Process Clo s ouds, provide a combina es ation of IT, in nfrastructure and BPO se ervices at a s single point. Wit this, the co th ompany offer end-to-end business pro rs ocess execution to clients through: Analytics inance and Accounts (F&A A A) Fi Human Resource Outsourcing (HRO), an nd rocurement Pr

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Tata Consultancy Services Limited

TCS launched iON, a 3rd generation Service Delivery Model, in 2011. Embraced with Cloud Computing, it is the worlds 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--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

Source: Company Data, Microsec Research

The structure while focusing on customer satisfaction enabled TCS to provide agility through reorganization of the companys 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

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Tata Consultancy Services Limited

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 companys 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:
S h aring of Cash Generated since FY2005 ( in ` Crore)

Capital Expenditure 7,451

Dividends 11,937

Acquisitions 5,566

Source: Company Data, Microsec Research

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.

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Peer Group TCS versus Infosys The Bellwether Race

Tata Consultancy Services Limited

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:
16.0% 12.0% 8.0% 5.0% 4.0% 0.0% 0.0% 4.0% INFY TCS 5.0% 10.0% INFY TCS Rev enues Growth over the period 20.0% 15.0% 10.0% PAT Growth over the period

200,000 175,000 150,000 125,000 100,000 75,000

H eadcount over the period 16.0%

Attrition over the period

13.0%

10.0%

INFY

TCS

INFY

TCS

30.0% 27.0% 24.0% 21.0% 18.0% 15.0%

PAT Margins over the period

33.0 30.0 27.0 24.0 21.0 18.0 15.0

PE (x) over FY2011

INFY

TCS

INFY

TCS

64.0% 50.0%

Returns over F Y2011

2,500.0 2,200.0

Market Capitalization (in ` Bn) over F Y2011

36.0% 22.0% 8.0% 1,600.0 6.0% 20.0% 1,300.0 1,900.0

INFY

TCS

INFY

TCS

Source: Company Data, Microsec Research, Bloomberg

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

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2. 3. 4. 5. Q-o-Q increase in Net Profit Total Headcount Attrition Levels PAT Margins

Tata Consultancy Services Limited

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 companys 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. 2. 3. Price-to-Earnings (PE) Multiple Stock Returns 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--vis Infosys 22.6%. Additionally, the companys 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 Net Sales Growth (%) EBITDA EBITDA Margins (%) Net Profit Net Profit Margins (%) Net Profit Growth (%) EPS BVPS P/E P/BV EV/EBITDA RoE Source: Companies' Data, Microsec Research TCS 37,324.51 24.30% 11,178.36 29.95% 9,068.04 24.30% 29.53% 46.27 124.69 25.95 9.63 20.37 37.2% Infosys 27,501.00 20.93% 8,958.00 32.57% 6,823.00 24.81% 8.89% 119.41 477.85 23.23 5.81 15.83 25.0%

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Key Management Personnel

Tata Consultancy Services Limited

TCS is led by well educated and highly qualified professionals and industry veterans. The companys 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:

Source: Company, Microsec Research

Continuing with its Customer Centric Organizational Structure, TCS recently made significant changes in the same. Under this, the companys 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 consolidationexisting 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 managements continued review and customer centric approach will remain instrumental in TCS future performance, in our view.

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Valuation

Tata Consultancy Services Limited

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.

PE
1,388.70 63.88 64.88 19.08 1218.70 1237.80 1256.90 1276.00 1295.10 20.08 1282.60 1302.70 1322.80 1342.90 1362.90 21.08 1346.50 1367.60 1388.70 1409.70 1430.80 22.08 1410.40 1432.50 1454.50 1476.60 1498.70 23.08 1474.30 1497.40 1520.40 1543.50 1566.60

EPS

65.88 66.88 67.88

Source: Microsec Research

PE Bands

2,000.00 1,600.00 1,200.00 800.00 400.00

18.0x

21.0x

24.0x

27.0x

CMP

Source: Microsec Research, Bloomberg

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Key Risks

Tata Consultancy Services Limited

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 companys 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 companys 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.

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Financial Statements
Income Statement (Quarterly) Net Revenues Salaries and Wages Overseas business expenses Other Operating Expenses EBIDTA Depreciation and Amortization EBIT Interest Other Income Profit Before Taxes Provision for Taxes: Net Profit before Tax & MI Share of Profits of Associates Minority Interest Net Profit after Tax & MI Diluted EPS
Income Statement (Annual) Net Revenues Salaries and Wages Overseas business expenses Other Operating Expenses EBIDTA Depreciation and Amortization EBIT Interest Other Income Profit Before Taxes Provision for Taxes Net Profit before Tax & MI Share of Profits of Associates Minority Interest Net Profit after Tax & MI Diluted EPS

Tata Consultancy Services Limited

Q1 11 8,217.28 3,039.05 1,253.74 1,514.99 2,409.50 161.53 2,247.97 2.68 95.46 2,340.75 402.80 1,937.95 0.30 31.58 1,906.07 9.74
FY2011A 37,324.51 13,726.10 5,529.21 6,890.84 11,178.36 735.26 10,443.10 26.48 604.00 11,020.62 1,830.83 9,189.79 0.30 121.45 9,068.04 46.27

Q2 11 9,286.39 3,411.19 1,390.40 1,708.63 2,776.17 172.46 2,603.71 15.28 70.75 2,659.18 460.14 2,199.04 29.83 2,169.21 11.08
FY2012E 46,436.36 16,998.58 6,733.27 8,590.73 14,113.78 873.85 13,239.93 7.48 464.36 13,696.81 3,150.27 10,546.54 131.83 10,414.71 53.21

Q3 11 9,663.35 3,552.23 1,405.57 1,805.89 2,899.66 188.39 2,711.27 4.87 194.21 2,900.61 504.14 2,396.47 26.64 2,369.83 12.08
FY2013E

Q4 11 10,157.49 3,723.63 1,479.50 1,861.33 3,093.03 212.88 2,880.15 3.65 243.58 3,120.08 463.75 2,656.33 33.40 2,622.93 13.43

Q1 12 E 10,652.71 4,034.95 1,544.64 1,970.75 3,102.37 204.73 2,897.64 1.87 106.53 3,002.30 690.53 2,311.77 28.90 2,282.87 11.66

Q2 12 E 11,533.74 4,290.98 1,672.39 2,133.74 3,436.63 213.72 3,222.91 1.87 115.34 3,336.37 767.37 2,569.01 32.11 2,536.89 12.96
FY2011A 24,504.81 458.17 74.80 109.49 25,147.27 5,716.27 3,232.00 1,762.67 160.18 14,276.15 25,147.27

Q3 12 E 11,957.87 4,326.09 1,733.89 2,212.21 3,685.68 222.99 3,462.69 1.87 119.58 3,580.40 823.49 2,756.91 34.46 2,722.44 13.91
FY2012E 34,919.52 590.00 74.80 109.49 35,693.81 6,748.48 3,232.00 1,762.67 160.18 23,790.48 35,693.81

Q4 12 E 12,292.04 4,346.56 1,782.35 2,274.03 3,889.10 232.41 3,656.69 1.87 122.92 3,777.74 868.88 2,908.86 36.36 2,872.50 14.68
FY2013E 47,813.91 753.22 74.80 109.49 48,751.42 8,029.67 3,232.00 1,762.67 160.18 35,566.91 48,751.42

Balance Sheet (Annual) Shareholders' Funds Minority Interest Loan Funds Deferred Tax Liabilities TOTAL FUNDS EMPLOYED Fixed Assets Goodwill (On Consolidation) Investments Deferred Tax Assets (Net) Net Current Assets TOTAL USES OF FUNDS

55,875.90 20,105.86 8,032.16 10,267.20 17,470.69 1,008.15 16,462.53 7.48 502.88 16,957.94 3,900.33 13,057.61 163.22 12,894.39 65.88

Cash Flow (Annual) Operating Profit before WC change Cash Generated From Operations Operating Cash Flow Investing Cash Flow Financing Cash Flow Cash Balance at beginning Net increase / (decrease) in cash Exchange Differences Deposits (maturity over 3 months) Restricted Cash Cash carried to BS

FY2011A 11,042.75 8,915.09 6,638.09 (1,531.25) (4,658.90) 1,024.37 447.94 30.28 5,849.38 26.12 7,378.09

FY2012E 14,570.66 12,671.58 9,521.31 (1,906.06) 1,502.59 7,615.25 5,875.50 14,993.34

FY2013E 17,966.09 16,103.02 12,202.70 (2,289.34) 9,117.84 9,913.35 5,875.50 24,906.69

Source: Company Data, Microsec Research RoE is calculated on Closing Basis All data in ` Crores unless specified Shaded part reflects estimates

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Analyst: npdaga@microsec.in
25 June 2011 Microsec Research


Microsec Research: Phone No.: 91 33 30512100 Email: microsec_research@microsec.in

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Ajay Jaiswal: President, Investment Strategies, Head of Research: ajaiswal@microsec.in Fundamental Research Name Nitin Prakash Daga Naveen Vyas Nitesh Goenka Abhisek Sasmal Sutapa Roy Gargi Deb Ravi Gupta Sectors IT, Telecom & Entertainment Midcaps,Market Strategies BFSI,Metal & Mining BFSI Economy Agriculture & Pharma Midcaps Designation AVP-Research AVP-Research Sr. Research Analyst Research Analyst Research Analyst Executive Research Executive Research Email ID npdaga@microsec.in nvyas@microsec.in ngoenka@microsec.in asasmal@microsec.in s-roy@microsec.in gdeb@microsec.in rgupta@microsec.in

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Rating Scale
Recommendation Strong Buy Buy Hold Underperform Sell Expected absolute returns (%) over 12 months >20% between 10% and 20% between 0% and 10% between 0% and -10% < -10%

21
Analyst: npdaga@microsec.in
25 June 2011 Microsec Research

Tata Consultancy Services Limited

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Analyst: npdaga@microsec.in
25 June 2011 Microsec Research

Tata Consultancy Services Limited

Disclaimer
The investments discussed or recommended in this report may not be suitable for all investors. Investors should use this research as one input into formulating an investment opinion. Additional inputs should include, but are not limited to, the review of other. This is not an offer (or solicitation of an offer) to buy/sell the securities/instruments mentioned or an official confirmation. Microsec Capital Limited is not responsible for any error or inaccuracy or for any losses suffered on account of information contained in this report. This report does not purport to be offer for purchase and sale of share/ units. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation discussed herein or act 23 as advisor or lender I borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The same persons may have acted upon the information contained here. No part of this material may be duplicated in any form and/or redistributed without Microsec Capital Limited prior written consent. 25 June 2011

Analyst: npdaga@microsec.in
Microsec Research

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